The Quick Ratio of a company is 0.8:1. State with reason, whether the following transactions will increase, decrease or not change the Quick Ratio:
(i) Purchase of loose tools for ₹2,000; (ii) Insurance premium paid in advance ₹500; (iii) Sale of goods on credit ₹3,000; (iv) Honoured a bills payable of ₹5,000 on maturity.

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Solution

Transaction Impact

Purchase of loose tools Rs 2,000 As cash is going out, quick assets are decreasing by 2,000. So, quick ratio will decrease.

Insurance premium paid in advance Rs 500 As cash is going out, quick assets are decreasing by 500. So, quick ratio will decrease.

Sale of goods on credit Rs 3,000 As debtors increase, quick assets also increase by 3,000. So, quick ratio will increase.

Honoured a bills payable Rs 5,000 on maturity As cash is going out, quick assets are decreasing by 5,000 and since bill is honoured current liabilities are decreasing. Thus, quick ratio will decrease.

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Similar questions

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.

Quick ratio of a company is 1 : 1. State giving reasons (for any four), which of the following would improve, reduce or not change the ratio ?

(i) Purchase of machinery for cash.
(ii) Purchase of goods on credit.
(iii) Sale of furniture at cost.
(iv) Sale of goods at a profit.
(v) Redemtption of debentures at a premium.

Q. 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.

Q. 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

R s . 50, 000

(ii) Creditors of

R s . 20, 000

paid off.

The Debt-Equity Ratio of a Company is 1 : 2. Which of the following would increase, decrease or not change it ?

(i) Repayment of Long term Borrowings of Rs. 40,000.

(ii) Purchased a fixed Asset for Rs. 50,000 on long-term deferred payment basis.

(iii) Issued new equity shared of Rs. 75,000.

(iv) Payment of Dividend Payable.

(v) Goods purchased on Credit.

(vi) Payment to Trade Payables.

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Transaction	Impact
Purchase of loose tools Rs 2,000	As cash is going out, quick assets are decreasing by 2,000. So, quick ratio will decrease.
Insurance premium paid in advance Rs 500	As cash is going out, quick assets are decreasing by 500. So, quick ratio will decrease.
Sale of goods on credit Rs 3,000	As debtors increase, quick assets also increase by 3,000. So, quick ratio will increase.
Honoured a bills payable Rs 5,000 on maturity	As cash is going out, quick assets are decreasing by 5,000 and since bill is honoured current liabilities are decreasing. Thus, quick ratio will decrease.