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Why loose tools are excluded from …

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Why loose tools are excluded from inventory for calculating current ratio ?

Posted by Misha Kapoor 7 years, 10 months ago

CBSE > Class 12 > Accountancy

2 answers

Amit Kumar 7 years, 10 months ago

Because it is used to do work and very low investment is required it helps to do work smoothly.....it is not sale and coverted into cash....it is not used to pay the liabilities of the firm

Siddhant Singh Rathore 7 years, 10 months ago

Current Ratio is calculated to measure the liquidity position of the business. Liquidity means that the assets can be easily converted into cash in no time and without incurring any significant loss. Loose Tools and spare parts are the parts of machinery which individually cannot do anything as these are machine specific i.e. these are used specifically for a particular type of machine only. Also, if these are sold, it becomes very difficult to use them and to operate them on other machines. Therefore, these are not considered liquid and hence are excluded from Inventory for the purpose of calculating Current Ratio.

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