T.S. Grewal Class 12 Vol 3 Chapter 4 Q.31 - Accounting Ratios

Question 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:
(i) Purchase of loose tools for ₹2,000; (ii) Insurance premium paid in advance ₹500; (iii) Sale of goods on credit ₹3,000; (iv) Honoured a bills payable of ₹5,000 on maturity.

Solution

Transaction	Impact
Purchase of loose tools ₹2,000	Decrease — loose tools are a Fixed Asset, so cash (a Quick Asset) goes out with no offsetting Quick Asset increase; Quick Assets fall by ₹2,000 while Current Liabilities are unaffected.
Insurance premium paid in advance ₹500	Decrease — cash (a Quick Asset) decreases by ₹500, becoming Prepaid Expenses, which is excluded from Quick Assets.
Sale of goods on credit ₹3,000	Increase — Trade Receivables (a Quick Asset) increase by ₹3,000, replacing Stock (which is not a Quick Asset), so Quick Assets rise with Current Liabilities unaffected.
Honoured a Bills Payable of ₹5,000 on maturity	Decrease — cash (Quick Assets) and the Bills Payable (Current Liabilities) both fall by ₹5,000. Since the ratio starts below 1:1 (Quick Assets < Current Liabilities), subtracting an equal amount from both moves the ratio further away from 1, i.e. it decreases (e.g. 8,000/10,000 = 0.8:1 becomes 3,000/5,000 = 0.6:1).