If the current ratio is 2:1. The Sale of inventories at profit for cash make what effect on the current ratio?
Answer & explanation
Correct answer: option 1
The correct answer is option 1- Improve.
Current ratio is 2:1.
Sale of inventories at profit for cash makes cash increased with profit and reduce stock with cost price.
So, Current liabilities remain unchanged and the sale of inventory at profit makes current assets to be increased by the amount of profit. So, the current ratio improved.
Lets assume Current assets is ₹2,00,000 and current liabilities is ₹1,00,000.
Goods are sold for ₹50,000 whereas book value is ₹40,000 which means cash is increased by ₹50,000 and stock is deducted by ₹40,000. means overall current assets is increased by 10,000. So new current assets is 2,10,000 and current liabilities is of ₹1,00,000.
So current ratio = 2,10,000/1,00,000
= 2.1:1.