## Quick Ratio of a company is 2: 1. State giving reasons, which of the following transactions would (i) improve, (ii) reduce, (iii) Not change the Quick Ratio: (a) Purchase of goods for cash; (b) Purchase of goods on credit; (c) Sale of goods (costing Rs. 10,000) for Rs. 10,000; (d) Sale of goods (costing Rs. 10,000) for Rs. 11,000; (e) Cash received from Trade Receivables.

SOLUTION

Quick Ratio = 2: 1
Let Quick Assets be = Rs. 20,000
Current Liabilities = Rs. 10,000

(a) Purchase of goods for Cash- Reduce
Reason: This transaction will result decrease in cash and increases in stock. Liquid Asset will decrease due payment for goods purchased.

Example: Purchase of goods Rs. 5,000 for cash
Quick Assets = 20,000 − 5,000 (Cash)
= Rs. 15,000
Quick ratio (After purchase of Assets) = (20,000-5,000) / 10,000
= 1.5: 1

(b) Purchase of goods on Credit- Reduce
Reason: Purchase of goods on credit will result increase in Current Liabilities and no change in Quick Assets.

Example: Purchase of goods on Credit Rs. 5,000
Current Liabilities = 10,000 + 5,000 (Creditors)
= Rs. 15,000
Quick ratio (After purchase of goods on credit) = 10,000 / (10,000+5,000)
= 1.33: 1

(c) Sale of goods for  Rs. 10,000- Improve
Reason: Sale of goods will result in increase in Quick Assets by the amount of  Rs. 10,000 in the form of either in cash or debtor. This transaction will result no change in current liabilities.
Quick ratio (After sale of goods) = (20,000 + 5,000) / 10,000
= 3: 1

(d) Sale of goods costing Rs. 10,000 of or Rs. 11,000- Improve
Reason: This transaction will increase the Quick Assets by Rs. 11,000 in the form of either in cash or debtors but no effect on the Current Liabilities.

Quick Assets after sale of goods = 20,000 + 11,000
= Rs. 31,000
Quick Ratio after sale of goods = (20,000 + 11,000) / 10,000
= 3. 1: 1

(e) Cash received from debtors- No change
Reason: This transaction results increase in one quick asset in the form of cash and decrease in other quick asset in the form of debtor with equal amount. Therefore, it results in no change in the total of Quick Assets.

Example: Cash received from debtors Rs. 5,000
Quick Assets = 20,000 + 5,000 (Cash) − 5,000 (Debtors)
= 20,000
Quick ratio = (20,000 – 5,000 + 5,000) / 10,000
(After cash received from debtors) = 2: 1