Question

The Current Ratio of Magnum Ltd. is 2.5 : 1. Which of the following transactions will result in decrease in this ratio?

Options

• Purchased goods for cash ₹ 73,000

• Cash collected from debtors ₹ 41,000

• Outstanding salaries paid ₹ 62,000

• Repayment of long-term loan ₹ 8,00,000

Answer 1

Repayment of long-term loan ₹ 8,00,000

Explanation:

The Current Ratio is calculated as Current Assets divided by Current Liabilities. The repayment of a long-term loan involves a cash payment, which directly decreases Current Assets. However, a long-term loan is classified as a non-current liability, so its repayment does not change Current Liabilities. Because the numerator (Current Assets) decreases while the denominator (Current Liabilities) remains unchanged, the overall value of the Current Ratio decreases.