Practicing Success

Target Exam

CUET

Subject

Accountancy

Chapter

Accounting Ratios

Question:

Assuming that the current ratio is 2 : 1, purchase of goods on credit would:

Options:

Increase Current ratio

Decrease Current ratio

Have no effect on Current ratio

All of these

Correct Answer:

Decrease Current ratio

Explanation:

Assuming that the current ratio is 2 : 1, purchase of goods on credit would decrease current ratio.

For example - Current assets is of ₹200000 and current liabilities is ₹100000 as current ratio is 2:1.
After purchase of goods on credit makes the creditors increased and stock increased.
So lets assume goods are of ₹50000 which are purchased so current assets and current liabilities are increased by ₹50000.
New current asset = 200000 + 50000 = 250000
New current liability = 100000 + 50000 = 150000
Current ratio = CA/CL
                     = 250000/150000
                     = 1.66 :1
Current ratio decreased to 1.66:1 from 2:1