Question

State giving reasons, which of the following transactions would improve, reduce or not change the Current Ratio, if Current Ratio of a company is (i) 1:1; or (ii) 0.8:1:
(a) Cash paid to Trade Payables.
(b) Purchase of Stock-in-Trade on credit.
(c) Purchase of Stock-in-Trade for cash.
(d) Payment of Dividend payable.
(e) Bills Payable discharged.
(f) Bills Receivable endorsed to a Creditor.
(g) Bills Receivable endorsed to a Creditor dishonoured.

Answer 1

(i)  Let’s assume Current Assets as Rs 1,00,000 and Current Liabilities as Rs 1,00,000

`"Current Ratio" = "Current Assets"/ "Current liability"`

Current Ratio = `100000/100000 = 1: 1`

(a) Cash paid to Trade Payables (say Rs 50,000)

Current Ratio = `(100000 - 50000)/(100000 - 50000) = 1 : 1` (No change)

(b) Purchase of Stock-in-Trade on credit (say Rs 50,000)

Current Ratio = `(100000 + 50000)/(100000 + 50000) = 1 : 1` (No change)

(c) Purchase of Stock-in-Trade for cash (say Rs 50,000)

Current Ratio = `(100000 + 50000 - 50000)/100000 = 1 : 1`   (No change)

(d) Payment of Dividend (say Rs 50,000)

Current Ratio = `(100000 - 50000)/(100000 - 50000) = 1 : 1` (No change)

(e) Bills Payable discharged (say Rs 50,000)

Current Ratio = `(100000 - 50000)/(100000 - 50000) = 1:1` (No change)

(f) Bills Receivable endorsed to a Creditor (say Rs 50,000)

Current Ratio = `(100000 - 50000)/(100000 - 50000) = 1:1` (No change)

(g) Bills Receivable endorsed to a Creditor dishonoured (say Rs 50,000)

Current Ratio = `(100000 + 50000)/(100000 + 50000) = 1:1` (No change)

(ii) Let’s assume Current Assets as Rs 80,000 and Current Liabilities as Rs 1,00,000

`"Current Ratio" = "Current Assets"/ "Current liability"`

Current Ratio =`80000/100000 = 0.8 : 1`

(a) Cash paid to Trade Payables (say Rs 50,000)

Current Ratio = `(80000 - 50000)/(100000 - 50000) = 0.6 : 1 ` (Reduce)

(b) Purchase of Stock-in-Trade on credit (say Rs 50,000)

Current Ratio = `(80000 + 50000)/(100000 + 50000) = 0.87 : 1 ` (Improve)

(c) Purchase of Stock-in-Trade for cash (say Rs 50,000)

Current Ratio = (80000 + 50000 - 50000)/100000 = 0.8 : 1 (No change)

(d) Payment of Dividend (say Rs 50,000)

Current Ratio = `(80000 - 50000)/(100000 - 50000) = 0.6 : 1 ` (Reduce)

(e) Bills Payable discharged (say Rs 50,000)

Current Ratio = `(80000 - 50000)/(100000 - 50000) = 0.6 : 1 ` (Reduce)

(f) Bills Receivable endorsed to a Creditor (say Rs 50,000)

Current Ratio = `(80000 - 50000)/(100000 - 50000) = 0.6 : 1 ` (Reduce)

(g) Bills Receivable endorsed to a Creditor dishonoured (say Rs 50,000)

Current Ratio = `(80000 + 50000)/(100000 + 50000) = 0.87 : 1 ` (Improve)