Question

Which of the following transactions will change the current ratio?

• A. Purchase of goods for cash.
• B. Plant acquired on account.
• C. Sold goods on credit.
• D. Debentures converted into equity capital.

Answer 1

The correct option is B Plant acquired on account.

1. When goods are purchased for cash the stock would increase and the cash balance would decrease and so there would be no effect on the current ratio.
2. When plant is acquired on account the fixed asset would increase and there would be increase in the creditors amount, hence the current ratio would decrease.
3. When goods are sold on credit the stock would decrease and the debtors would increase and hence there would be no effect on current ratio.
4. When debentures are converted into equity capital there would be no changes in current assets and current liabilities and so no change in current ratio.