State giving reasons, which of the following transactions would improve, reduce or not change the Current Ratio, if Current Ratio of a company is (i) 1:1; or (ii) 0.8:1:
(a) Cash paid to Trade Payables.
(b) Purchase of Stock-in-Trade on credit.
(c) Purchase of Stock-in-Trade for cash.
(d) Payment of Dividend payable.
(e) Bills Payable discharged.
(f) Bills Receivable endorsed to a Creditor.
(g) Bills Receivable endorsed to a Creditor dishonoured.

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Solution

(i) Let’s assume Current Assets as Rs 1,00,000 and Current Liabilities as Rs 1,00,000

$\begin{array}{l} Current Ratio = \frac{Current Assets}{Current Liabilities} \\ Current Ratio = \frac{1, 00, 000}{1, 00, 000} = 1 : 1 \end{array}$

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

$Current Ratio = \frac{1, 00, 000 - 50, 000}{1, 00, 000 - 50, 000} = 1 : 1 (No change)$

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

$Current Ratio= \frac{1, 00, 000 + 50, 000}{1, 00, 000 + 50, 000} = 1 : 1 (No change)$

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

$Current Ratio = \frac{1, 00, 000 + 50, 000 - 50, 000}{1, 00, 000} = 1 : 1 (No change)$

(d) Payment of Dividend (say Rs 50,000)

$Current Ratio = \frac{1, 00, 000 - 50, 000}{1, 00, 000 - 50, 000} = 1 : 1 (No change)$

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

$Current Ratio = \frac{1, 00, 000 - 50, 000}{1, 00, 000 - 50, 000} = 1 : 1 (No change)$

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

$Current Ratio= \frac{1, 00, 000 - 50, 000}{1, 00, 000 - 50, 000} = 1 : 1 (No change)$

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

$Current Ratio = \frac{1, 00, 000 + 50, 000}{1, 00, 000 + 50, 000} = 1 : 1 (No change)$

(ii) Let’s assume Current Assets as Rs 80,000 and Current Liabilities as Rs 1,00,000

$\begin{array}{l} Current Ratio = \frac{Current Assets}{Current Liabilities} \\ Current Ratio = \frac{80, 000}{1, 00, 000} = 0.8 : 1 \end{array}$

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

$Current Ratio = \frac{80, 000 - 50, 000}{1, 00, 000 - 50, 000} = 0.6 : 1 (Reduce)$

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

$Current Ratio= \frac{80, 000 + 50, 000}{1, 00, 000 + 50, 000} = 0.87 : 1 (Improve)$

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

$Current Ratio = \frac{80, 000 + 50, 000 - 50, 000}{1, 00, 000} = 0.8 : 1 (No change)$

(d) Payment of Dividend (say Rs 50,000)

$Current Ratio = \frac{80, 000 - 50, 000}{1, 00, 000 - 50, 000} = 0.6 : 1 (Reduce)$

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

$Current Ratio = \frac{80, 000 - 50, 000}{1, 00, 000 - 50, 000} = 0.6 : 1 (Reduce)$

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

$Current Ratio= \frac{80, 000 - 50, 000}{1, 00, 000 - 50, 000} = 0.6 : 1 (Reduce)$

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

$Current Ratio = \frac{80, 000 + 50, 000}{1, 00, 000 + 50, 000} = 0.87 : 1 (Improve)$

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Similar questions

Q. 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.

Assuming that the Current Ratio is 2 : 1, state, giving reasons, which of the following transactions would (i) improve, (ii) reduce, or (iii) not alter, the current ratio,

(i) Cash collected from trade receivables or cash received against B/R on its maturity.

(ii) B/R received from trade receivables or B/R drawn.

(iii) B/R endorsed to trade payables.

(iv) B/R dishonoured.

(v) Sale of Inventories at par for cash.

Find out the credit purchases from the following:

	Rs
Balance of creditors April 01, 2016	45,000
Balance of creditors March 31, 2017	36,000
Cash paid to creditors	1,80,000
Cheque issued to creditors	60,000
Cash purchases	75,000
Discount received from creditors	5,400
Discount allowed	5,000
Bills payable given to creditors	12,750
Return outwards	7,500
Bills payable dishonoured	3,000
Bills receivable endorsed to creditors	4,500
Bills receivable endorsed to creditors dishonoured	1,800
Return inwards	3,700

Q. 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.

Q. Question : Prepare the bills payable account from the following and find out missing figure if any.

	(Rs)
Bills accepted	$1, 05, 000$
Discount received	$17, 000$
Purchases returns	$9, 000$
Return inwards	$12, 000$
Cash paid to accounts payable	$50, 000$
Bills receivable endorsed to creditor	$45, 000$
Bills dishonoured	$17, 000$
Bad debts	$14, 000$
Balance of accounts payable (closing)	$85, 000$
Credit purchases	$2, 15, 000$

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