16 :- 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 dishonoured.
(g) Purchase 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 us assume Current Assets be Rs 2,00,000
And Current Liabilities be Rs 1,00,000

Current Ratio = Current Assets/Current Liabilities
= 2,00,000/1,00,000
= 2 : 1

(a) Cash Paid to Trade Payables
Let us assume Trade Payables be Rs 50,000
Current Ratio = 2,00,000 – 50,000/1,00,000 – 50,000
= 1,50,000/50,000
= 3 : 1(Improve)

Cash Paid to Trade Payables will Improve Current Ratio as both Current Assets and Current Liabilities are decreased by Same amount.

(b) Bills Payable Discharged
Let us assume Bills Payable discharged be Rs 50,000
Current Ratio = 2,00,000 – 50,000/1,00,000 – 50,000
= 1,50,000/50,000
= 3 : 1(Improve)

Bills Payable discharged will Improve Current Ratio as both Current Assets and Current Liabilities are decreased by Same amount.

(c) Bills Receivable endorsed to a creditor
Let us assume Bills Receivable endorsed be Rs 50,000
Current Ratio = 2,00,000 – 50,000/1,00,000 – 50,000
= 1,50,000/50,000
= 3 : 1(Improve)

Bills Receivable Endorsed will Improve Current Ratio as both Current Assets (Bills Receivable) and Current Liabilities (Creditors) are decreased by Same amount.

(d) Payment of Final Dividend already Declared
Let us assume Final Dividend paid be Rs 50,000
Current Ratio = 2,00,000 – 50,000/1,00,000 – 50,000
= 1,50,000/50,000
= 3 : 1(Improve)

Payment of Final Dividend already declared will Improve Current Ratio as both Current Assets (Cash) and Current Liabilities (Dividend) are decreased by Same amount.

(e) Purchase of Stock in Trade on Credit
Let us assume Purchase of Stock in Trade on Credit be Rs 50,000
Current Ratio = 2,00,000 + 50,000/1,00,000 + 50,000
= 2,50,000/1,50,000
= 1.67 : 1 (Reduce)

Purchase of Stock in Trade on Credit will Reduce the Current Ratio as both Current Assets and Current Liabilities are Increased by Same Amount.

(f) Bills Receivable endorsed to a creditor Dishonoured
Let us assume Bills Receivable endorsed to a creditor Dishonoured be Rs 50,000
Current Ratio = 2,00,000 + 50,000/1,00,000 + 50,000
= 2,50,000/1,50,000
= 1.67 : 1 (Reduce)

Bills Receivable endorsed to a creditor Dishonoured will Reduce the Current Ratio as both Current Assets and Current Liabilities are Increased by Same Amount.

(g) Purchase of Stock in Trade for Cash
Let us assume Purchase of Stock in Trade for Cash be Rs 50,000
Current Ratio = 2,00,000 + 50,000 – 50,000/1,00,000
= 2,00,000/1,00,000
= 2 : 1 (No Change)

Purchase of Stock in Trade for cash will not affect the current Ratio as it will increase and decrease the Current Assets by Same amount and Current Liabilities also remains the same.

(h) Sale of Fixed Assets (Book Value Rs 50,000) for Rs 45,000.
Current Ratio = 2,00,000 + 45,000/1,00,000
= 2,45,000/1,00,000
= 2.45 : 1 (Improve)

It will improve the Current Ratio as it will only increase the Current Assets (Cash) and Current Liabilities remains same.

(i) Sale of Fixed assets (Book Value Rs 50,000) for Rs 60,000.
Current Ratio = 2,00,000 + 60,000/1,00,000
= 2,60,000/1,00,000
= 2.60 : 1

It will improve the Current Ratio as it will only increase the Current Assets (Cash) and Current Liabilities remains same.

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