Question

State giving reason, whether the Current Ratio will improve or decline or will have no effect in each one of the following transactions if Current Ratio is (I) 2.5 : 1, (II) 1 : 1, (III) 0.75 : 1.

1. Paid ₹ 50,000 to a Creditor.
2. Sale of goods at a loss of 10%.
3. Sale of a Machinery for ₹ 1,00,000 (Book Value ₹ 1,20,000).
4. Payment of outstanding salaries.
5. Received ₹ 25,000 from a Debtor of ₹ 30,000 in full settlement of his account.
6. Bills payable discharged on maturity.
7. Bills Receivable drawn on debtor.
8. Purchased goods on credit.
9. Issued debentures to the vendors of machinery.
10. Payment of Dividend.

Answer 1

Tr. No.	If Current Ratio is 2.5 : 1	If Current Ratio is 1 : 1	If Current Ratio is 0.75 : 1	Reason
1.	Improve	No effect	Decline	The current assets and liabilities are also reduced by the same number.
2.	Decline	Decline	Decline	Current Assets are diminished by the loss number, but Current Liabilities are unaffected.
3.	Improve	Improve	Improve	Current assets rise by Rs. 1,00,000, although current liabilities remain unchanged.
4.	Improve	No effect	Decline	The current assets and liabilities are also reduced by the same number.
5.	Decline	Decline	Decline	Current Assets are reduced by Rs. 5,000, although Current Liabilities are unaffected.
6.	Improve	No effect	Decline	The current assets and liabilities are also reduced by the same number.
7.	No effect	No effect	No effect	A existing asset (debtor) is exchanged for a current asset (B/R)
8.	Decline	No effect	Improve	This transaction increases both Current Assets and Current Liabilities by the same amount.
9.	No effect	No effect	No effect	This transaction has no direct impact on current assets or liabilities, hence, the current ratio remains constant regardless of the initial ratio.
10.	Improve	No effect	Decline	Both the Current Assets and Current Liabilities will decrease by the same amount.