Question

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.

Answer 1

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