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State giving reasons, which of the following transactions would improve, reduce or not change the Current Ratio, if Current Ratio of a company is (i) 1: 1; or (ii) 0.8: 1(a) Cash paid to Trade Payables.(b) Purchase of Stock-in-Trade on credit.(c) Purchase of Stock-in-Trade for cash.(d) Payment of Dividend payable.(e) Bills Payable discharged.(f) Bills Receivable endorsed to a Creditor.(g) Bills Receivable endorsed to a Creditor dishonoured.

SOLUTION

(i)  Let’s assume Current Assets as Rs. 1,00,000 and Current Liabilities as Rs. 1,00,000
Current Ratio = Current Assets / Current Liabilities
Current Ratio  = 1,00,000 / 1,00,000
 = 1: 1

(a) Cash paid to Trade Payables (say Rs. 50,000)
Current Ratio = (1,00,000 − 50,000) / (1,00,000 − 50,000)
 = 1: 1 (No change)

(b) Purchase of Stock-in-Trade on credit (say Rs. 50,000)
Current Ratio = (1,00,000 + 50,000) / (1,00,000 + 50,000)
 = 1: 1 (No change)

(c) Purchase of Stock-in-Trade for cash (say Rs. 50,000)
Current Ratio = (1,00,000 + 50,000 − 50,000) /  (1,00,000)
 = 1: 1 (No change)

(d) Payment of Dividend (say Rs. 50,000)
  Current Ratio = (1,00,000 − 50,000) / (1,00,000 − 50,000)
 = 1: 1 (No change)

(e) Bills Payable discharged (say Rs. 50,000)
Current Ratio = (1,00,000 − 50,000) / (1,00,000 − 50,000)
= 1: 1 (No change)
 
(f) Bills Receivable endorsed to a Creditor (say Rs. 50,000)
 Current Ratio = (1 ,00,000 − 50,000) / (1,00,000 − 50,000)
 = 1: 1 (No change)

(g) Bills Receivable endorsed to a Creditor dishonoured (say Rs. 50,000)
 Current Ratio = (1,00,000 + 50,000) / (1,00,000 + 50,000)
 = 1: 1 (No change)

(ii) Let’s assume Current Assets as  Rs. 80,000 and Current Liabilities as  Rs. 1,00,000
Current Ratio = Current Assets / Current Liabilities
Current Ratio = 80,000 / 1,00,000
= 0.8: 1

(a) Cash paid to Trade Payables (say Rs. 50,000)
 Current Ratio = (80,000 − 50,000) / (1,00,000 − 50,000)
 = 0.6: 1 (Reduce)

(b) Purchase of Stock-in-Trade on credit (say Rs. 50,000)
 Current Ratio = (80,000 + 50,000) / (1,00,000 + 50,000)
 = 0.87: 1 (Improve)

(c) Purchase of Stock-in-Trade for cash (say Rs. 50,000)
Current Ratio = (80,000 + 50,000 − 50,000) / (1,00,000)
= 0.8: 1 (No change)

(d) Payment of Dividend (say Rs. 50,000)
Current Ratio = (80,000 − 50,000) / (1,00,000 − 50,000)
 = 0.6: 1 (Reduce)

(e) Bills Payable discharged (say Rs. 50,000)
Current Ratio = (80,000 − 50,000) / (1,00,000 − 50,000)
= 0.6: 1 (Reduce)

(f) Bills Receivable endorsed to a Creditor (say Rs. 50,000)
Current Ratio = (80,000 − 50,000) / (1,00,000 − 50,000)
= 0.6: 1 (Reduce)

(g) Bills Receivable endorsed to a Creditor dishonored (say Rs. 50,000)
Current Ratio = (80,000 + 50,000) / (1,00,000 + 50,000)
= 0.87: 1 (Improve)


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