T.S. Grewal Class 12 Vol 3 Chapter 4 Q.16 - Accounting Ratios

Question 16

State, giving reason, whether the Current Ratio will improve, decline, or have no effect in each of the following transactions if the 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 ₹50,000) for ₹45,000.
(i) Sale of Fixed Assets (Book Value ₹50,000) for ₹60,000.

Solution

Assume Current Assets = ₹2,00,000 and Current Liabilities = ₹1,00,000, so the base Current Ratio = 2,00,000 ÷ 1,00,000 = 2:1.

Transaction (assume ₹50,000 where an amount is needed)	New Current Ratio
(a) Cash paid to Trade Payables — both CA and CL decrease by 50,000	(1,50,000 ÷ 50,000) = 3:1 (Improve)
(b) Bills Payable discharged — both CA and CL decrease by 50,000	3:1 (Improve)
(c) Bills Receivable endorsed to a creditor — both CA and CL decrease by 50,000	3:1 (Improve)
(d) Payment of final Dividend already declared — both CA and CL decrease by 50,000	3:1 (Improve)
(e) Purchase of Stock-in-Trade on credit — both CA and CL increase by 50,000	(2,50,000 ÷ 1,50,000) = 1.67:1 (Decline)
(f) Bills Receivable endorsed to a Creditor dishonoured — the receivable is reinstated (CA increases) and the liability to the creditor is reinstated (CL increases), both by 50,000	1.67:1 (Decline)
(g) Purchase of Stock-in-Trade for cash — Cash decreases and Inventory increases by the same amount within Current Assets; CL unchanged	2:1 (No Effect)
(h) Sale of Fixed Assets (Book Value 50,000) for 45,000 — Cash (CA) increases by 45,000; CL unchanged	(2,45,000 ÷ 1,00,000) = 2.45:1 (Improve)
(i) Sale of Fixed Assets (Book Value 50,000) for 60,000 — Cash (CA) increases by 60,000; CL unchanged	(2,60,000 ÷ 1,00,000) = 2.6:1 (Improve)