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Question
State giving reason, whether the Current Ratio will improve or decline or will have no effect in each of the following transactions if Current Ratio is 2:1:
(a) Cash paid to Trade Payables.
(b) Bills Payable discharged.
(c) Bills Receivable endorsed to a creditor.
(d) Payment of final Dividend already declared.
(e) Purchase of Stock-in-Trade on credit.
(f) Bills Receivable endorsed to a Creditor dishonoured.
(g) Purchases of Stock-in-Trade for cash.
(h) Sale of Fixed Assets (Book Value of ₹50,000) for ₹45,000.
(i) Sale of FIxed Assets (Book Value of ₹50,000) for ₹60,000.
Solution
Let’s assume Current Assets as Rs 2,00,000 and Current Liabilities as Rs 1,00,000
`"Current Ratio" = "Current Assets"/ "Current liability" = 200000/100000 = 2 : 1`
(a) Cash paid to Trade Payables (say Rs 50,000)
`"Current Ratio" = (200000 - 50000)/(100000 - 50000) = 3 : 1` (Improve)
(b) Bills Payable discharged (say Rs 50,000)
`"Current Ratio" = (200000 - 50000)/(100000 - 50000) = 3 : 1` (Improve)
(c) Bills Receivable endorsed to a creditor (say Rs 50,000)
`"Current Ratio" = (200000 - 50000)/(100000 - 50000) = 3 : 1` (Improve)
(d) Payment of final Dividend already declared (say Rs 50,000)
`"Current Ratio" = (200000 - 50000)/(100000 - 50000) = 3 : 1` (Improve)
(e) Purchase of Stock-in-Trade on credit (say Rs 50,000)
`"Current Ratio" = (200000 + 50000)/(100000 + 50000) = 1.67 : 1`(Decline)
(f) Bills Receivable endorsed to a Creditor dishonoured (say Rs 50,000)
`"Current Ratio" = (200000 + 50000)/(100000 + 50000) = 1.67 : 1`(Decline)
(g) Purchase of Stock-in-Trade for cash (say Rs 50,000)
Current Ratio = `(200000 + 50000 - 50000)/100000` = 2:1 (No effect)
(h) Sale of Fixed Assets (Book value of Rs 50,000) for Rs 45,000
Current Ratio = `(200000 + 45000)/100000 = 2.45 : 1` (Improve)
(i) Sale of Fixed Assets (Book value of Rs 50,000) for Rs 60,000
Current Ratio = `(200000 + 60000)/100000 = 2.6:1` (Improve)
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