Target Exam

CUET

Subject

-- Accountancy Part B

Chapter

Accounting Ratios

Question:

The current ratio is 2:1.

The impact of goods purchased on credit will:

Options:

Increase the ratio

Decrease the ratio

No change in ratio

Incomplete information

Correct Answer:

Decrease the ratio

Explanation:

The correct answer is option 2- Decrease the ratio.

Current ratio = 2:1
Purchase of goods on credit will increase the stock in the current assets and creditors on the current liabilities side. 
Lets assume current asset is 2,00,000 and current liabilities is 1,00,000 and goods are purchased for 20,000

New current asset = 2,00,000 + 20,000
                           = 2,20,000

New current liability = 1,00,000 + 20,000
                              = 1,20,000

New ratio = 2,20,000/1,20,000
               = 1.83 :1

Thus, current ratio decreases.