The correct answer is option 1- Payment to a Trade Creditor.
Working Capital will not change if there is an equal change in current asset and current liability or no change in both and it can be possible with option 1 and 4.
The current ratio can increase with a decrease in current assets and decrease in current liabilities by the same amount or by increase in current assets only which can be possible with option 1 only.
* Payment to a Trade Creditor- It increase the current ratio but no change in working capital.
Lets assume current assets is ₹2,00,000 and current liabilities is ₹1,00,000 & Working capital is 2,00,000 - 1,00,000 = 1,00,000.
Payment to creditors of ₹50,000 makes the cash to decrease and creditors by the same amount.
It means current assets (cash) and current liabilities (creditors) is decreased by 50,000 which makes the current ratio increase as now it will be-
1,50,000/50,000 means 3:1
but no change in working capital as current assets - current liabilities = (1,50,000 - 50,000) means 1,00,000 as before.
OTHER OPTIONS-
- Cash payment of Non-current Liability- It decreases the current ratio and working capital.
Let us assume cash payment of 50,000 is made for non current liability. It will decrease current assets by 50,000 which now become 1,50,000 but no affect on current liabilities as it is non current liability. So, new current ratio will be- 1,50,000/1,00,000 i.e. 1.5 :1 which is reduced now from earlier given ratio (2:1). There is also a change in working capital. Now it will be 50,000 (1,50,000 -1,00,000).
- Sale of Fixed Assets for Cash- It increases both current ratio and working capital.
Let us assume cash payment of 50,000 is received for sale of machinery. It will increase current assets by 50,000 which now become 2,50,000 but no affect on current liabilities. So, new current ratio will be- 2,50,000/1,00,000 i.e. 2.5 :1 which is increased now from earlier given ratio (2:1). There is also a change in working capital. Now it will be 1,50,000 (2,50,000 -1,00,000).
- Purchase of Stock-in-Trade on credit- It decreases current ratio but no change in working capital.
Let us assume stock of 50,000 is purchased. It will increase current assets by 50,000 which now become 2,50,000. It also increases creditors on current liabilities side which make current liabilities 1,50,000. So, new current ratio will be- 2,50,000/1,50,000 i.e. 2.5 :1.5 which is reduced now from earlier given ratio (2:1). There is no change in working capital (2,50,000 - 1,50,000).
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