The current liabilities of XYZ Co. Ltd. are ₹ 1,50,000. Its current ratio is 3: 1 and liquid ratio is 1: 1. The value of stock will be:

Question

Accepted Answer

The correct option is 3:
This question is a classic exercise in utilizing two primary liquidity ratios, the Current Ratio and the Liquid Ratio (also known as the Acid-Test Ratio), to isolate the value of a single current asset: Stock (Inventory). The solution requires a two-step calculation. First, the Current Ratio (Current Assets/Current Liabilities) of 3:1 allows us to find the Current Assets: ₹ 1,50,000 Current Liabilities \* 3 = ₹ 4,50,000. Second, the Liquid Ratio (Liquid Assets/Current Liabilities) of 1:1 gives us the Liquid Assets: ₹ 1,50,000 Current Liabilities \* 1 = ₹ 1,50,000. Since Liquid Assets are defined as Current Assets minus Stock (and Prepaid Expenses, which are generally assumed zero unless stated), the value of stock is simply the difference between the Current Assets and the Liquid Assets. Therefore, Stock = ₹ 4,50,000 - ₹ 1,50,000, which yields the correct answer of ₹ 3,00,000.

The incorrect option is 1:
The amount ₹ 4,50,000 represents the total Current Assets of the company. This value is derived correctly in the first step of the analysis by multiplying the Current Ratio (3) by the Current Liabilities (₹ 1,50,000). Selecting this option would mean you calculated the total pool of short-term assets but confused it with the value of the inventory, which is only a component of the Current Assets. A quick check reveals that stock must be less than total current assets.

The incorrect option is 2:
The amount ₹ 1,50,000 represents the company's Liquid Assets (or Quick Assets). This is the result of multiplying the Liquid Ratio (1) by the Current Liabilities (₹ 1,50,000). Liquid Assets are calculated specifically to exclude the least liquid items, namely stock (inventory) and prepaid expenses, to determine the firm’s immediate ability to pay its short-term debts. Therefore, this figure excludes the very value the question asks you to find.

The incorrect option is 4:
The stock value *can* be computed because all the necessary variables are explicitly given. The values for Current Liabilities, the Current Ratio, and the Liquid Ratio provide enough data to establish the absolute amounts of both Current Assets and Liquid Assets. In financial accounting, whenever the total of a group of assets (Current Assets) and the total of a subset (Liquid Assets) are known, the value of the excluded component (Stock) is always computable.