It is given in the TSGrewal Part II book that loose tools are excluded from the current assests? Why? (Pg- 4.5)

Dear Student
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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