Question

The current ratio is 2:1
State giving reasons which of the following transactions would improve, reduce and not change the current ratio.
"Payment of dividend."

Options

• Improved

• Reduced

• Cannot be determined

• None of the above

Answer 1

Reduced

Explanation:

Assume a dividend of Rs. 5,000 is paid out. It will cut current assets to Rs. 45,000 while leaving current liabilities unchanged. The new ratio will be 1.8 (45,000/25,000). As a result, it has decreased.