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      Question

      Which of the following transactions will improve the

      Current Ratio of a company, assuming it is initially greater than 1:1?
      A Purchase of goods on credit Correct Answer Incorrect Answer
      B Payment to a trade payable Correct Answer Incorrect Answer
      C Sale of a non-current asset at book value for cash Correct Answer Incorrect Answer
      D Issuing bonus shares Correct Answer Incorrect Answer
      E Writing off bad debts Correct Answer Incorrect Answer

      Solution

      The Current Ratio = Current Assets / Current Liabilities. Selling a non-current asset for cash increases Current Assets (Cash) without affecting Current Liabilities, thus improving the ratio. (a) Increases both CA (Inventory) and CL (Creditors) equally, ratio decreases if >1. (b) Decreases both CA (Cash) and CL (Creditors) equally, ratio decreases if >1. (d) & (e) have no impact on current assets or liabilities.

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