Question

The current ratio of a company is 1.8 : 1, and its Quick Ratio is 1.6 : 1.

From the following transactions, choose the transaction which will increase both the current ratio and the quick ratio.

Options

• Goods of 10,000 sold at a loss of ₹ 2,000.

• Insurance premium of ₹ 3,000 paid in advance.

• Plant and Machinery purchased for ₹ 9,000.

• Creditors of ₹ 20,000 paid.

Answer 1

Creditors of ₹ 20,000 paid.

Explanation:

Paying creditors reduces both Current Assets (Cash) and Current Liabilities by the exact same amount. For an initial Current Ratio that is greater than 1 : 1 (1.8 : 1), an equal deduction from both the numerator and the denominator mathematically causes the overall ratio to increase. Similarly, because cash is a core Quick Asset and the initial Quick Ratio is also greater than 1 : 1 (1.6 : 1), this equal decrease on both sides causes the Quick Ratio to rise simultaneously.