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Question
The Quick Ratio of a company is 0.8 : 1. State whether the Quick Ratio will improve, decline or will not change in the following cases:
- Cash collected from Debtors ₹ 50,000.
- Creditors of ₹ 20,000 paid off.
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Solution 1
- No Change
- Decline
Solution 2
- The quick ratio will not change.
Reason: Cash (a quick asset) increases, but debts (also a quick asset) decrease by the same amount. The total quick assets stay unchanged, and there is no effect on current liabilities. - The quick ratio will decline.
Reason: The quick ratio will decline if cash (a quick asset) decreases while paying off current liabilities, reducing overall quick assets.
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