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    Question

    When a company's current ratio stands at 2:1, indicating

    it has double the amount of current assets as liabilities, how does purchasing goods on credit affect this financial metric?
    A It will increase the ratio Correct Answer Incorrect Answer
    B The ratio will decrease Correct Answer Incorrect Answer
    C No impact on the current ratio Correct Answer Incorrect Answer
    D The ratio increases slightly Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Say for example we have current asset of Rs. 200 & current liabilities of Rs. 100 as a result the current ratio is 2:1, now suppose if we are purchasing goods on credit worth Rs. 50. This will result in increase in current asset by Rs. 50 (Inventory purchased) & also increase in current liability by Rs. 50 (Creditors increased). Now the new current ratio is 250/150 i.e., 1.66. hence the ratio has decreased.

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