Question

Assuming that the Current Ratio is 2 : 1, state, giving reasons, which of the following transactions would (i) improve, (ii) reduce, or (iii) not alter, the current ratio,

(i) Cash collected from trade receivables or cash received against B/R on its maturity.

(ii) B/R received from trade receivables or B/R drawn.

(iii) B/R endorsed to trade payables.

(iv) B/R dishonoured.

(v) Sale of Inventories at par for cash.

Answer 1

Statement showing the effect of various transations on Current Ratio :

$\begin{array}{ccc}\text{Tr.}& \text{Current}& \text{Reasons}\\ \text{(i)}& \text{Not Alter}& \text{Neither the current assets nor the current liabilities are affected since there is only}\\ & & \text{a conversion of one current asset into another current asset.}\\ \text{(ii)}& \text{Not Alter}& \text{Neither the current assets nor the current liabilities are affected since there also,}\\ & & \text{there is only a conversion of one current asset (i.e., Trade Receivable) into}\\ & & \text{another current asset (i.e., B/R).}\\ \text{(iii)}& \text{Improve}& \text{Both the current assets and current liabilites are decreased by the same amount.}\\ \text{(iv)}& \text{Not Alter}& \text{Neither the current assets nor the current liabilities are affected since}\text{there is only a conversion of one current asset (i.e. B/R) \&\& into another current asset (i.e., Trade Receivables).}\\ \text{(v)}& \text{Not Alter}& \text{Neither the current assets nor the current liabilities are affected since there}\\ & & \text{is only a conversion of one current asset into another current asset}\\ & & \end{array}$