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Question

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

Current Ratio=Current AssetsCurrent LiabilitiesCurrent Ratio =1,00,0001,00,000=1:1


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

Current Ratio =1,00,00050,0001,00,00050,000=1:1 (No change)

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

Current Ratio=1,00,000+50,0001,00,000+50,000=1:1(No change)

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

Current Ratio =1,00,000+50,00050,0001,00,000=1:1 (No change)

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

Current Ratio =1,00,00050,0001,00,00050,000=1:1 (No change)

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

Current Ratio =1,00,00050,0001,00,00050,000=1:1 (No change)

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

Current Ratio=1,00,00050,0001,00,00050,000=1:1 (No change)

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

Current Ratio =1,00,000+50,0001,00,000+50,000=1:1 (No change)


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

Current Ratio=Current AssetsCurrent LiabilitiesCurrent Ratio =80,0001,00,000=0.8:1


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

Current Ratio =80,00050,0001,00,00050,000=0.6:1 (Reduce)

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

Current Ratio=80,000+50,0001,00,000+50,000=0.87:1(Improve)

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

Current Ratio =80,000+50,00050,0001,00,000=0.8:1 (No change)

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

Current Ratio =80,00050,0001,00,00050,000=0.6:1 (Reduce)

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

Current Ratio =80,00050,0001,00,00050,000=0.6:1 (Reduce)

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

Current Ratio=80,00050,0001,00,00050,000=0.6:1 (Reduce)

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

Current Ratio =80,000+50,0001,00,000+50,000=0.87:1 (Improve)

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