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?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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