Question

Quick Ratio of a company is 2:1. State giving reasons, which of the following transactions would (i) improve, (ii) reduce, (iii) Not change the Quick Ratio:
(a) Purchase of goods for cash; (b) Purchase of goods on credit; (c) Sale of goods (costing ₹10,000) for ₹10,000; (d) Sale of goods (costing ₹10,000) for ₹11,000; (e) Cash received from Trade Receivables.

Answer 1

Quick Ratio = 2:1

Let Quick Assets be = Rs 20,000

Current Liabilities = Rs 10,000

(a) Purchase of goods for Cash- Reduce

Reason: This transaction will result decrease in cash and increases in stock. Liquid Asset will decrease due payment for goods purchased.

Example: Purchase of goods Rs 5,000 for cash

Quick Assets = 20,000 − 5,000 (Cash) = Rs 15,000

(b) Purchase of goods on Credit- Reduce

Reason: Purchase of goods on credit will result increase in Current Liabilities and no change in Quick Assets.

Example: Purchase of goods on Credit Rs 5,000

Current Liabilities = 10,000 + 5,000 (Creditors) = Rs15,000

(c) Sale of goods for Rs 10,000- Improve

Reason: Sale of goods will result in increase in Quick Assets by the amount of Rs 10,000 in the form of either in cash or debtor. This transaction will result no change in current liabilities.

(d) Sale of goods costing Rs 10,000 of or Rs 11,000- Improve

Reason: This transaction will increase the Quick Assets by Rs 11,000 in the form of either in cash or debtors but no effect on the Current Liabilities.

Quick Assets after sale of goods = 20,000 + 11,000 = Rs 31,000

$QuickRatioaftersaleofgoods=\frac{(20,000+11,000)}{10,000}=3.1:1$

(e) Cash received from debtors- No change

Reason: This transaction results increase in one quick asset in the form of cash and decrease in other quick asset in the form of debtor with equal amount. Therefore it result in no change in the total of Quick Assets.

Example: Cash received from debtors Rs 5,000

Quick Assets = 20,000 + 5,000 (Cash) − 5,000 (Debtors) = 20,000