Question

The Quick Ratio of a company is $0.8:1$. State whether the Quick Ratio will improve, decline or will not change in the following cases:
(i) Cash collected from Debtors $Rs.50,000$
(ii) Creditors of $Rs.20,000$ paid off.

Answer 1

Let Quick Assets = $Rs.80000$ and Current Liabilities = $Rs.100000$

Quick Ratio = Quick assets/Current liabilities

= $80000/100000$

= $0.8:1$

Now,

(i) When $Rs.50000$ cash is collected from debtors there would be no net increase or decrease in the quick assets as the cash balance would increase and the debtors balance would decrease simultaneously. And so the Quick ratio would not change.

(ii) When creditors of $Rs.20000$ are paid off then there would be decrease in both the creditors balance and the cash balance. The revised Quick ratio = $[80000-20000]/[100000-20000]$

= $0.75:1$

And so quick ratio would decline in this scenario.