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Question
The Quick Ratio of a company is 0.8 : 1. State with reason whether the following transactions will increase, decrease or not change the quick ratio :
(1) Purchase of loose tools Rs 2,000.
(2) Insurance premium paid in advance Rs 500.
(3) Sale of goods on credit Rs 3,000.
(4) Honoured a bills payable Rs 5,000 on maturity.
Solution
|
Transaction |
Implication |
|
Purchase of loose tools Rs 2,000 |
Quick assets are decreasing by 2,000 (as cash is going out), so quick ratio will decrease. |
|
Insurance premium paid in advance Rs 500 |
Quick assets are decreasing by 500 (as cash is going out), so quick ratio will decrease. |
|
Sale of goods on credit Rs 3,000 |
Quick assets are increasing by 3,000 (as debtors increase), so quick ratio will improve. |
|
Honoured a bills payable Rs 5,000 on maturity |
Quick assets are decreasing by 5,000 (as cash is going out) and current liabilities are also decreasing (since accepted bill is honoured), so quick ratio will reduce. |
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