Accountancy Part BAccounting Ratios

The current ratio of a firm is 3 : 1. Identify how the payment of cur…

The current ratio of a firm is 3 : 1. Identify how the payment of current liability will affect it.

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Improve current ratio

Paying a current liability reduces current assets (cash) and current liabilities by the same amount. When the ratio is more than 1 : 1, an equal fall in both makes the ratio rise.

Suppose current assets = ₹3,00,000 and current liabilities = ₹1,00,000 (ratio 3 : 1).

After paying ₹50,000 of creditors: ₹2,50,000 / ₹50,000 = 5 : 1, so the ratio improves.

Option (2) Reduce current ratio — Incorrect. The ratio would fall only if it were below 1 : 1.

Option (3) No change in current ratio — Incorrect. The ratio stays the same only when it is 1 : 1.

Option (4) Will affect the solvency ratio — Incorrect. The question is about the current ratio, a liquidity ratio; solvency ratios deal with long-term debt and funds.

NCERT (2026-27 edition):
Liquidity Ratios – “The current ratio is 2 : 1. State giving reasons which of the following transactions would improve, reduce and not change the current ratio: Payment of current liability; Purchased goods on credit; Sale of a Computer (Book value: Rs. 4,000) for Rs. 3,000 only; Sale of merchandise (goods) costing Rs. 10,000 for Rs. 11,000; Payment of unclaimed dividend.”