Answer the following question:
The current ratio of a company is 2: 1. State giving reason whether the purchase of goods on credit will increase, decrease, or not change the ratio.
Decline, as both Current Assets and Current Liabilities, have increased due to the purchase of goods on credit.
For example, a company has Current Assets of ₹ 2,00,000 and Current Liabilities of ₹ 1,00,000. Afterward, goods of ₹ 10,000 were purchased on credit.
Current Ratio = `"Current Assets"/"Current Liabilities" = (2,00,000 + 10,000∗)/(1,00,000+10,000∗) = 1.9090 : 1`
∗ Purchase of goods on credit will increase the stock and increase the creditors by ₹10,000