The Current Ratio of a Company is 2:1. State the effect on the current ratio from the transaction 'Purchasing goods on credit'.
Answer & explanation
Correct answer: option 2
The correct answer is option 2- Reduce.
Purchasing Goods on Credit:
Suppose, current assets are 2,00,000 and Current Liability are 1,00,000 and goods for 25,000 is purchased on credit.
Current liability = 1,00,000+ 25,000 (Trade Payables)
= 1,25,000
Current asset = 2,00,000 + 25,000(inventory)
= ₹2,25,000
Current ratio = 2,25,000/1,25,000
= 1.8:1
So, the current ratio is reduced.