State giving reasons, which of the following transactions would improve, reduce or not change the Current Ratio, if Current Ratio of a company is 2:1
(a) Cash paid to Trade Payables.
(b) Purchase of Stock-in-Trade on credit.
(c) Purchase of Stock-in-Trade for cash.
(d) Bills Receivable endorsed to a Creditor

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Solution

Dear Student,
Let's assume Current Assets as Rs 2,00,000 and Current Liabilities as Rs 100000.
Current Ratio = Current Assets / Current liability
=200000/100000
= 2:1
(a) Cash paid to Trade Payables (say Rs 50,000)

So, Current Ratio = 150000 / 50000 = 3:1 (Improve)
(b) Purchase of Stock-in-Trade on credit

(say Rs 50,000)

Current Ratio = 250000/150000 = 1.67 : 1 (Decline)
(c)Purchase of Stock-in-Trade for cash (say Rs 50,000)

Current Ratio = 200000+50000-50000/100000
= 200000/100000 = 2:1 (No effect)
(d) Bills Receivable endorsed to a creditor (say Rs 50,000)
Current Ratio = 150000/50000 = 3:1 (Improve)
Regards

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