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Question
The quick ratio of a company is 1.5: 1. A state with reason which of the following transactions would
i. increase:
ii. decrease or
iii. not change the ratio
a. Paid rent Rs 3,000 in advance.
b. Trade receivables included a debtor Shri Ashok who paid his entire amount due Rs 9,700.
Solution
Quick Ratio = `"Quick Assets"/"Current Liabilities"`
1) Rent of Rs 3,000 paid in advance will affect the current assets in two ways:
- Cash will reduce by Rs 3,000.
- Pre-paid expenses will increase by Rs 3,000.
Quick Assets do not include pre-paid expenses. So, quick assets will reduce by Rs 3,000 and subsequently, the Quick ratio will also decrease.
2) A debtor of Rs 9,700 paid his due amount will affect the quick assets in two ways:
Increase in Cash by Rs 9,700
Decrease in Debtors by Rs 9,700
This simultaneous increase and decrease will not affect the value of quick assets and thus there will be no change in the ratio.
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