## State giving reason, whether the Current Ratio will improve or decline or will have no effect in each of the following transactions if Current Ratio is 2: 1 (a) Cash paid to Trade Payables. (b) Bills Payable discharged. (c) Bills Receivable endorsed to a creditor. (d) Payment of final Dividend already declared. (e) Purchase of Stock-in-Trade on credit. (f) Bills Receivable endorsed to a Creditor dishonored. (g) Purchases of Stock-in-Trade for cash. (h) Sale of Fixed Assets (Book Value of Rs. 50,000) for Rs. 45,000. (i) Sale of Fixed Assets (Book Value of Rs. 50,000) for Rs. 60,000.

SOLUTION

Let’s assume Current Assets as Rs. 2,00,000 and Current Liabilities as Rs. 1,00,000
Current Ratio = Current Assets / Current Liabilities
Current Ratio  = 2,00,000 / 1,00,000
= 2: 1

(a) Cash paid to Trade Payables (say Rs. 50,000)
Current Ratio = 2,00,000 − 50,000:  1,00,000 − 50,000
= 3: 1 (Improve)

(b) Bills Payable discharged (say Rs. 50,000)
Current Ratio = 2,00,000 − 50,000 / 1,00,000 − 50,000
= 3: 1 (Improve)

(c) Bills Receivable endorsed to a creditor (say Rs. 50,000)
Current Ratio = 2,00,000 − 50,000 / 1,00,000 − 50,000
= 3: 1 (Improve)

(d) Payment of final Dividend already declared (say Rs. 50,000)
Current Ratio = 2,00,000 − 50,000 / 1,00,000 − 50,000
= 3: 1 (Improve)

(e) Purchase of Stock-in-Trade on credit (say Rs. 50,000)
Current Ratio  = 2,00,000 + 50,000 / 1,00,000 + 50,000
= 1.67: 1 (Decline)

(f) Bills Receivable endorsed to a Creditor dishonoured (say Rs. 50,000)

Current Ratio  = 2,00,000 + 50,000 / 1,00,000 + 50,000
= 1.67: 1 (Decline)

(g) Purchase of Stock-in-Trade for cash (say Rs. 50,000)

Current Ratio   = 2,00,000 + 50,000 − 50,000 / 1,00,000
= 2: 1 (No effect)

(h) Sale of Fixed Assets (Book value of Rs. 50,000) for Rs. 45,000

Current Ratio = 2,00,000 + 45,000 / 1,00,000
= 2.45: 1 (Improve)

(i) Sale of Fixed Assets (Book value of Rs. 50,000) for Rs. 60,000
Current Ratio = 2,00,000 + 60,000 / 1,00,000
= 2.6: 1 (Improve)