Question

The Quick Ratio of a Company is 1.5 : 1. State giving reasons which of the following transactions would (i) Improve; (ii) Reduce; (iii) Not change; the Quick Ratio:

1. Payment of Trade Payables.
2. Purchase of goods for Cash.
3. Purchase of goods on Credit.
4. Sale of goods Costing ₹ 50,000 for ₹ 50,000.
5. Sale of goods Costing ₹ 50,000 for ₹ 45,000.
6. Cash received from Trade Receivables.

Answer 1

Tr. No.	Effect on Quick Ratio	Reason
a.	Improve	Payment of trade payables decreases both Current Liabilities and Liquid Assets (since cash is reduced), but the reduction in Current Liabilities will have a greater impact on improving the Quick Ratio.
b.	Reduce	Quick assets (cash) decrease, while inventory (not a quick asset) increases. Current liabilities remain unchanged, leading to a reduced ratio.
c.	Reduce	Inventory (not a quick asset) increases, and current liabilities increase. Quick assets remain unchanged, resulting in a lower ratio.
d.	Improve	Inventory (not a quick asset) decreases, and quick assets (cash or receivables) increase. Current liabilities are unchanged, improving the ratio.
e.	Improve	Inventory (not a quick asset) decreases while quick assets increase, even though the loss. Current liabilities are unchanged, which improves the ratio.
f.	Not change	This involves exchanging one quick asset (accounts receivable) for another (cash). Total quick assets and current liabilities are unchanged.