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Question
The current ratio of X. Ltd is 2:1. State with reason which of the following transaction would
i. Increase or ii. decrease or iii. not change the ratio
1. Included in the trade payables was a bills payable of Rs.9,000 which was met on maturity.
2. Company issued 1,00,000 equity shares of Rs.10 each to the Vendors of machinery purchased.
Solution
`"Current ratio =""Current Assets"/"Current Liabilities"`
1. A bill payable of Rs.9,000 was met on maturity will affect:
Trade Payables will reduce by Rs.9,000.
Cash will reduce by Rs.9,000.
Simultaneous decrease in current assets and current liabilities will improve current ratio.
2. Issue of shares of Rs.10.00.000 to vendor of Machinery will affect the following:
Increase in the balance of machinery
Increase in the amount of share capital
There is no affect to the current liabilities nor current assets. Thus, current ratio will remain unchanged.
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