Question

The Current Ratio of a Company is 3:1. State giving reasons which of the following suggestions would (i) improve, (ii) reduce, (iii) not change the Current Ratio:

1. Payment of Trade Payables.
2. Sale of goods costing ₹ 20,000 for ₹ 20,000 for Cash.
3. Sale of goods costing ₹ 20,000 for ₹ 18,000 on Credit.
4. Sale of goods costing ₹ 20,000 at a profit of ₹ 1,000.
5. Purchase of goods on Credit.
6. Purchase of goods for Cash.
7. Purchase of machinery against long-term loan.

Answer 1

Tr. No.	Effect on Current Ratio will	Reasons
a.	Improve	Both the current assets and current liabilities are decreased by the same amount.
b.	Not Change	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).
c.	Reduce	Current liabilities remain unchanged but current assets are decreased by amount of loss.
d.	Improve	Current liabilities remain unchanged but current assets are increased by amount of profit.
e.	Reduce	Both the current assets and current liabilities are increased by the same amount.
f.	Not Change	Neither the current assets not 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).
g.	Not Change	Neither the current assets nor the current liabilities are affected since both the non-current assets and non-current liabilities are increased by the same amount.