Question

If a firm has realized its debtors and has paid off its creditors to the same extent then .

• A. The current ratio will increase if it was less than 1 previously
• B. The current ratio will decrease if it was more than 1 previously
• C. The current ratio will remain the same if it was equal to 1 previously
• D. All of the above
• E. Both (A) and (C) above

Answer 1

The correct option is C The current ratio will remain the same if it was equal to 1 previously

If the firm has realized its debtors and paid-off its creditors to same extent then the current assets will increase and the current liabilities will decrease by the same amount and consequently the current ratio will remain unchanged.

Let Current Asset be $Rs.500000$ and Current liabilities be $Rs.500000$

So, Current ratio = Current asset/ Current liabilities

=$500000/500000$

=$1$

Now, if the amount realized from debtors = $Rs.100000$ and the amount paid off to creditors is $Rs.100000$ then,

New Current ratio = $[500000-100000]/[500000-100000]$

= $1$.