Question

Current ratio is increased by :
1) Issue of redeemable debentures.
2) Selling of old machine for cash.
3) Converting debentures into equity capital.
4) Cash received from debtors.

• A. 1, 2 and 4
• B. 3 and 4
• C. 1 and 2
• D. 4 only

Answer 1

Answer: (C)

1 and 2

Current ratio = Current assets/ Current liabilities

1. When Redeemable debentures are issued, long term liabilities and the current assets increase,while the current liabilities remain constant so the current ratio would increase.
2. When old machine is sold for cash, fixed assets would decrease and the current assets would increase, while the current liabilities remain constant so the current ratio would increase.
3. When debentures are converted into equity capital there would be no changes in the current assets and the current liabilities and ultimately no change in the current ratio.
4. When cash is received from debtors there would be no net changes on the current assets as the cash balance would increase and the debtors balance would decrease by the same amount and hence there would no change in the current ratio.