Question

The Quick Ratio of a company is 0.8 : 1. State with reason whether the following transactions will increase, decrease or not change the quick ratio :
(1) Purchase of loose tools Rs 2,000.
(2) Insurance premium paid in advance Rs 500.
(3) Sale of goods on credit Rs 3,000.
(4) Honoured a bills payable Rs 5,000 on maturity.

Answer 1

Transaction	Implication
Purchase of loose tools Rs 2,000	Quick assets are decreasing by 2,000 (as cash is going out), so quick ratio will decrease.
Insurance premium paid in advance Rs 500	Quick assets are decreasing by 500 (as cash is going out), so quick ratio will decrease.
Sale of goods on credit Rs 3,000	Quick assets are increasing by 3,000 (as debtors increase), so quick ratio will improve.
Honoured a bills payable Rs 5,000 on maturity	Quick assets are decreasing by 5,000 (as cash is going out) and current liabilities are also decreasing (since accepted bill is honoured), so quick ratio will reduce.