31 :- The Quick Ratio of a company is 0.8 : 1. State, with reason, whether the following transactions will increase, decrease or not change the Quick Ratio:
(a) Purchase of loose tools for Rs 2,000; (b) Insurance premium paid in advance Rs 500; (c) Sale of goods on credit Rs 3,000; (d) Honoured a Bills Payable of Rs 5,000 on maturity.
Solution :-
Let the Quick Assets be Rs 80,000 and Current Liabilities be Rs 1,00,000.
Quick Ratio = Quick Assets/Current Liabilities
= 80,000/1,00,000
= 0.8 : 1
(a) Purchase of loose tools for Rs 2,000.
Quick Ratio = Quick Assets/Current Liabilities
= 80,000 – 2,000/1,00,000
= 78,000/1,00,000
= 0.78 : 1 (Decrease)
Purchase of loose tools for Rs 2,000 will decrease the Quick Ratio as it Decrease the Quick Assets (Cash) and Current Liabilities remains the same.
(b) Insurance premium paid in advance Rs 500.
Quick Ratio = Quick Assets/Current Liabilities
= 80,000 – 500/1,00,000
= 79,500/1,00,000
= 0.795 : 1 (Decrease)
Insurance premium paid in advance Rs 500 will decrease the Quick Ratio as it Decrease the Quick Assets (Cash) and Current Liabilities remains the same.
(c) Sale of goods on credit Rs 3,000
Quick Ratio = Quick Assets/Current Liabilities
= 80,000 – 3,000/1,00,000
= 77,000/1,00,000
= 0.77 : 1
Sale of goods on credit Rs 3,000 will decrease the Quick Ratio as it Decrease the Quick Assets and Current Liabilities remains the same.
(d) Honoured a Bills Payable of Rs 5,000 on maturity.
Quick Ratio = Quick Assets/Current Liabilities
= 80,000 – 5,000/1,00,000 – 5,000
= 75,000/95,000
= 0.789 : 1 (Decrease)
Honoured a Bills Payable of Rs 5,000 on Maturity will Decrease the Quick Ratio as it will Decrease both Quick Assets and Current Liabilities with the same amount.