Question

Assuming that the current ratio of a company is 0.7 : 1, mention whether this ratio would increase, decrease or not change after the following transactions:

1. Payment of ₹ 15,000 made to a creditor.
2. Purchase of inventory worth ₹ 1,00,000 on credit.

Answer 1

1. Paying ₹ 15,000 to a creditor decreases both current assets and liabilities. The current assets, such as cash, decrease by ₹ 15,000, while the current liabilities, payable to creditors, are also reduced by the same amount. Because both current assets and current liabilities fall by the same amount, the current ratio remains constant.
2. Purchasing inventory on credit for ₹ 1,00,000 impacts both current assets and liabilities. Adding inventory increases current assets by ₹ 1,00,000. The company’s current liabilities grow by ₹ 1,00,000 due to the credit purchase, which means they now owe this amount to their suppliers. Because both current assets and current liabilities increase in the same proportion, the current ratio remains constant.