Which of the following transactions makes no change in the current ratio (2:1) of the company?
1) B/R received from debtors.
2) Sale of inventories at profit for cash
3) Cash collected from trade receivables
4) Purchase of inventories for cash
5) B/R endorsed to trade payables
6) Sale of fixed asset on long-term deferred payment basis
7) Repayment of long-term loan
Choose the correct answer from the options given below.
Answer & explanation
Correct answer: option 4
The correct answer is option 4- 1, 3, 4, 6.
1) B/R received from debtors- Not alter (Neither current assets nor current liabilities are affected because there is a conversion of one current asset into another current asset).
2) Sale of inventories at profit for cash- Improve (Current liabilities remain unchanged but current assets are increases by the amount of profit as cash increases).
3) Cash collected from trade receivables- Not alter (Neither current assets nor current liabilities are affected because there is a conversion of one current asset (trade receivable) into another current asset (cash).
4) Purchase of inventories for cash- Not alter (Neither current assets nor current liabilities are affected because there is a conversion of one current asset (cash) into another current asset (stock).
5) B/R endorsed to trade payables- Improve (Both current assets and current liabilities are decreased by the same amount).
6) Sale of fixed asset on long-term deferred payment basis- Not alter (Neither current assets nor current liabilities are affected because the non current assets are increased as well decreased by the same amount).
7) Repayment of long-term loan- Reduce (Current liabilities remain unchanged but current assets are decreased as cash is reduced).