Question

Assuming that the current ratio is 1.5 : 1, state giving reasons, which of the following transactions would (i) improve, (ii) reduce, (iii) not alter the current ratio:

1. Realisation of current assets.
2. Payment of current liabilities.
3. B/R dishonoured
4. Sale of goods at par.
5. Sale of goods at profit.
6. Sale of goods at loss.
7. Purchase of goods for cash.
8. Purchase of goods on credit.
9. Sale of furniture for cash.
10. Sale of machinery on a credit of 5 months.
11. Sale of land on long-term deferred payment basis.
12. Purchase of motor car for cash.
13. Purchase of a building on a credit of 4 months.
14. Purchase of a plot of land on long-term deferred payment basis.
15. Repayment of long-term loan which was availed from a bank.
16. Issue of shares for Cash.

Answer 1

Tr. No.	Current Ratio will	Reasons
i.	Not Alter	Neither the current assets nor the current liabilities are affected since there is only a conversion of one current asset into another current asset.
ii.	Improve	Both the current assets and current liabilities are decreased by the same amount.
iii.	Not Alter	Neither the current assets not the current liabilities are affected since there is only a conversion of one current asset (i.e., B/R) into another current assets (i.e., Trade Receivables).
iv.	Not Alter	Neither the current assets not the current liabilities are affected since there is only a conversion of one current asset (i.e., Inventory) into another current asset (i.e., Cash).
v.	Improve	Current liabilities remain unchanged, but current assets are increased by the amount of profit.
vi.	Reduce	Current liabilities remain unchanged, but current assets are decreased by the amount of the loss.
vii.	Not Alter	Neither the current assets nor the current liabilities are affected since there is only a conversion of one current asset (i.e., cash) into another current asset (i.e., Inventory).
viii.	Reduce	Both the current assets and current liabilities are increased by the same amount.
ix.	Improve	Current liabilities remain unchanged, but current assets have increased.
x.	Improve	Current liabilities remain unchanged, but current assets have increased.
xi.	Not Alter	Neither the current assets nor the current liabilities are affected since the total non-current assets are increased as well as decreased by the same amount.
xii.	Reduce	Current liabilities remain unchanged, but current assets have decreased.
xiii.	Reduce	Current assets remain unchanged but current liabilities are increased.
xiv.	Not Alter	Neither the current assets nor the current liabilities are affected since both the non-current assets and non-current Liabilities increased by the same amount.
xv.	Reduce	Current liabilities remain unchanged, but current assets have decreased.
xvi.	Improve	Current liabilities remain unchanged, but current assets increased by the amount of profit.