Question
A company’s financial position shows: •
Current Assets: ₹1,00,000 • Current Liabilities: ₹50,000 The company settles ₹20,000 of its accounts payable by making a cash payment. Based on the above transaction, what will be the revised current ratio, and how is it impacted?Solution
Initial Position: • Current Assets = ₹1,00,000 • Current Liabilities = ₹50,000 • Current Ratio = ₹1,00,000 / ₹50,000 = 2.00 : 1 Transaction: • Payment of ₹20,000 from cash (current asset) to accounts payable (current liability) New Current Assets = ₹1,00,000 – ₹20,000 = ₹80,000 New Current Liabilities = ₹50,000 – ₹20,000 = ₹30,000 New Current Ratio = ₹80,000 / ₹30,000 = 2.67 : 1 Conclusion: The current ratio improves because the proportionate reduction in liabilities is greater than the reduction in assets.
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