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Question

State giving reason, whether the Current Ratio will improve or decline or will have no effect in each of the following transactions if Current Ratio is 2:1:
(a) Cash paid to Trade Payables.
(b) Bills Payable discharged.
(c) Bills Receivable endorsed to a creditor.
(d) Payment of final Dividend already declared.
(e) Purchase of Stock-in-Trade on credit.
(f) Bills Receivable endorsed to a Creditor dishonoured.
(g) Purchases of Stock-in-Trade for cash.
(h) Sale of Fixed Assets (Book Value of ₹50,000) for ₹45,000.
(i) Sale of FIxed Assets (Book Value of ₹50,000) for ₹60,000.

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Solution

Let’s assume Current Assets as Rs 2,00,000 and Current Liabilities as Rs 1,00,000
Current Ratio=Current AssetsCurrent LiabilitiesCurrent Ratio=2,00,0001,00,000=2:1

(a) Cash paid to Trade Payables (say Rs 50,000)

Current Ratio =2,00,00050,0001,00,00050,000=3:1 (Improve)


(b) Bills Payable discharged (say Rs 50,000)

Current Ratio = 2,00,00050,0001,00,00050,000=3:1 (Improve)

(c) Bills Receivable endorsed to a creditor (say Rs 50,000)

Current Ratio =2,00,00050,0001,00,00050,000=3:1 (Improve)

(d) Payment of final Dividend already declared (say Rs 50,000)

Current Ratio =2,00,00050,0001,00,00050,000=3:1 (Improve)

(e) Purchase of Stock-in-Trade on credit (say Rs 50,000)

Current Ratio =2,00,000+50,0001,00,000+50,000=1.67:1 (Decline)

(f) Bills Receivable endorsed to a Creditor dishonoured (say Rs 50,000)

Current Ratio =2,00,000+50,0001,00,000+50,000=1.67:1 (Decline)

(g) Purchase of Stock-in-Trade for cash (say Rs 50,000)


Current Ratio =2,00,000+50,00050,0001,00,000=2:1 (No effect)

(h) Sale of Fixed Assets (Book value of Rs 50,000) for Rs 45,000

Current Ratio=2,00,000+45,0001,00,000=2.45:1 (Improve)

(i) Sale of Fixed Assets (Book value of Rs 50,000) for Rs 60,000

Current Ratio =2,00,000+60,0001,00,000=2.6:1 (Improve)

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