Question

State giving reasons which of the following transactions would Improve; Reduce; or Not change the Quick Ratio if Quick Ratio is (i) 1.5 : 1; (ii) 1 : 1 or (iii) 0.8 : 1.

1. Payment of Outstanding Liabilities.
2. Debentures of ₹ 2,00,000 converted into equity shares.
3. Purchase of goods on Credit of 2 months.
4. B/R endorsed to a Creditor.
5. Sale of goods Costing ₹ 50,000 for ₹ 45,000.
6. B/R drawn on a Debtor.
7. Paid Rent ₹ 3,000 in advance. 
8. Trade receivables included a debtor, Sh. Ashok who paid his entire amount due ₹ 9,700.

Answer 1

Tr. No.	If Quick Ratio is 1.5 : 1	If Quick Ratio is 1 : 1	If Quick Ratio is 0.8 : 1	Reasons
a.	Improve	Not Change	Reduce	When outstanding liabilities are paid, the company's cash (a quick asset) decreases, and its current liabilities (such as accounts payable) also decrease by the same amount.
b.	Not Change	Not Change	Not Change	Debentures are long-term liabilities, and their conversion to equity shares does not affect quick assets or current liabilities.
c.	Reduce	Reduce	Reduce	Purchases of goods on credit increases current liabilities (accounts payable) without increasing quick assets, decreasing the quick ratio.
d.	Improve	Not Change	Reduce	Endorsing a Bills Receivable (B/R) to a creditor involves providing the B/R (a quick asset) to settle the existing balance owed to the creditor (a current liability). This move lowers both fast assets (Bills Receivable) and current liabilities (Creditors) by the same amount.
e.	Improve	Improve	Improve	Sale of goods, whether for cash or credit, increases quick assets (cash or accounts receivable) while not affecting current liabilities, thus improving the quick ratio.
f.	Not change	Not Change	Not Change	Drawing a Bill’s Receivable on a debtor converts one quick asset (accounts receivable) into another quick asset (Bill’s Receivable), resulting in no net change to quick assets.
g.	Reduce	Reduce	Reduce	Paying rent in advance decreases quick assets (cash) and increases prepaid expenses (which are not quick assets), thus reducing the quick ratio.
h.	Not Change	Not Change	Not Change	Cash collected from accounts receivable converts one quick asset (accounts receivable) into another (cash), resulting in no net change to quick assets.