Current Liabilities of a company were Rs. 1,75,000 and its Current Ratio was 2: 1. It paid Rs. 30,000 to a Creditor. Calculate Current Ratio after payment.

SOLUTION

Current ratio = Current assets / Current liabilities = 2: 1
Current Liabilities = Rs. 1,75,000

Payment of Rs. 30,000 to a Creditor will have two effects:

Decrease in Cash by Rs. 30,000 and therefore Current Assets will decrease to Rs. 3,20,000.
Decrease in Creditors by Rs. 30,000 and this will decrease Current Liabilities to Rs. 1,45,000.

Current ratio = Current assets / Current liabilities
= 3,20,000 / 1,45,000
= 2.21: 1