Q.From the illustrative Balance Sheet in Section 1 (Current Assets ₹5,00,000, comprising Inventories ₹2,00,000, Trade Receivables ₹1,50,000, Cash ₹1,00,000, and Prepaid Expenses ₹50,000; Current Liabilities ₹2,00,000), calculate the Current Ratio and the Quick Ratio.

The Current Ratio uses all current assets, while the Quick Ratio strips out the two current assets that cannot be readily converted into cash.

Current Ratio = Current Assets (₹5,00,000) ÷ Current Liabilities (₹2,00,000) = 2.5 : 1. Quick Assets = Current Assets minus Inventories (₹2,00,000) minus Prepaid Expenses (₹50,000) = ₹2,50,000, giving a Quick Ra …

Step 1 — Current Ratio.

Current Ratio = Current Assets ÷ Current Liabilities = 5,00,000 ÷ 2,00,000 = 2.5 : 1.

Step 2 — Quick Assets.

Quick Assets = Current Assets − Inventories − Prepaid Expenses = 5,00,000 − 2,00,000 − 50,000 = ₹2,50,000.

Step 3 — Quick Ratio.

Quick Ratio = Quick Assets ÷ Current Liabilities = 2,50,000 ÷ 2,00,000 = 1.25 : 1. …

A common mistake is forgetting to also deduct PREPAID EXPENSES (not just Inventory) when computing Quick Assets — prepaid expenses represent a service already paid for, not an asset that w …