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State giving reasons which of the following transactions would improve, reduce and not change the current ratio The current ratio is 2:1 "Repayment of current liability" -

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Question

State giving reasons which of the following transactions would improve, reduce and not change the current ratio
The current ratio is 2:1

"Repayment of current liability"

Options

  • Improved

  • Reduced

  • Can't say

  • None of the above

MCQ

Solution

Improved

Explanation:

The change in the ratio depends upon the original ratio. Let us assume that current assets are Rs. 50,000 and current liabilities are Rs. 25,000; and so the current ratio is 2:1. Now we will analyses the effect of given transactions on current ratio.

(1) Assume that Rs. 10,000 of creditors is paid by cheque. This will reduce the current assets to Rs. 40,000 and current liabilities to Rs. 15,000. The new ratio will be 2.67(Rs.  40,000/Rs. 15,000). Hence, it has improved.

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