T.S. Grewal Class 12 Vol 3 Chapter 4 Q.29 - Accounting Ratios

Question 29

Quick Ratio of a company is 2:1. State, giving reasons, which of the following transactions would (i) improve, (ii) reduce, or (iii) not change the Quick Ratio:
(a) Purchase of goods for cash; (b) Purchase of goods on credit; (c) Sale of goods (costing ₹20,000) for ₹20,000; (d) Sale of goods (costing ₹20,000) for ₹22,000; (e) Cash received from Trade Receivables.

Solution

Assume Quick Assets = ₹40,000 and Current Liabilities = ₹20,000, so the base Quick Ratio = 40,000 ÷ 20,000 = 2:1.

(a) Purchase of goods for cash, say ₹10,000 — Reduce
Reason: Cash (a Quick Asset) decreases, while the goods purchased become Stock/Inventory, which is NOT a Quick Asset — so total Quick Assets decrease while Current Liabilities are unaffected.
Quick Assets = 40,000 − 10,000 = ₹30,000
New Quick Ratio = 30,000 ÷ 20,000 = 1.5:1

(b) Purchase of goods on credit, say ₹10,000 — Reduce
Reason: Current Liabilities (Trade Payables) increase, while Quick Assets are unaffected (the goods purchased become Stock, not a Quick Asset).
Current Liabilities = 20,000 + 10,000 = ₹30,000
New Quick Ratio = 40,000 ÷ 30,000 = 1.33:1

(c) Sale of goods (costing ₹20,000) for ₹20,000 — Improve
Reason: Quick Assets increase by ₹20,000 (received as cash or a debtor), with no change to Current Liabilities.
New Quick Ratio = (40,000 + 20,000) ÷ 20,000 = 3:1

(d) Sale of goods (costing ₹20,000) for ₹22,000 — Improve
Reason: Quick Assets increase by the full ₹22,000 realised (cash or debtor), with no change to Current Liabilities.
Quick Assets = 40,000 + 22,000 = ₹62,000
New Quick Ratio = 62,000 ÷ 20,000 = 3.1:1

(e) Cash received from Trade Receivables, say ₹10,000 — No Change
Reason: This only converts one Quick Asset (Debtors) into another (Cash) in equal amount — total Quick Assets are unaffected.
Quick Assets = 40,000 + 10,000 (Cash) − 10,000 (Debtors) = ₹40,000
New Quick Ratio = 40,000 ÷ 20,000 = 2:1