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Question

# 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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