Q. 5 DK Goel Accounting Ratios Solutions Class 12 CBSE (2024-25)

the solutions of Question number 5 of Accounting Ratios chapter 5 of DK Goel Class 12 CBSE (2024-25)

The Current Ratio of a Company is 3 : 1. State giving reasons which of the following suggestions would (i) improve; (ii) reduce; (iii) not change; the Current Ratio:-

(a) Payment of Trade Payables.

(b) Sale of goods costing ₹ 20,000 for ₹ 20,000 for Cash.

(c) Sale of goods costing ₹ 20,000 for ₹ 18,000 on Credit.

(d) Sale of goods costing ₹ 20,000 at a profit of ₹ 3,000.

(e) Purchase of goods on credit.

(f) Purchase of goods for cash.

(g) Purchase of machinery against long-term loan.

[Ans. (a) Improve; (b) No change; (c) Reduce; (d) Improve; (e) Reduce; (f) No Change; (g) No Change.]

Solution:-

The Current Ratio as given in the question is 3 : 1. In order to understand the question in a simple manner, It may be assumed that current assets are ₹ 3,00,000 and current liabilities are ₹ 1,00,000.

(a) Payment of Trade Payables:-

Let’s Suppose, Trade Payables are ₹ 3,00,000.

It will decrease Cash (Current Assets) and decrease Trade Payables (Current Liabilities) with the same amount.

$$\begin{gathered} = \frac{3,\mathrm{00,000} – \mathrm{50,000} \left(Cash\right)}{1,\mathrm{00,000} – \mathrm{50,000} (Trade Payables)} \\ = \frac{2,5\mathrm{0,000}}{5\mathrm{0,000}} \\ = 5 : 1 \end{gathered}$$

(b) Sale of goods costing ₹ 20,000 for ₹ 20,000 for Cash:-

It will increase Cash (Current Assets) and decrease Inventory (Current Assets) with the same amount. It will not change the Current Ratio.

$$\begin{gathered} = \frac{3,\mathrm{00,000} + \mathrm{50,000} \left(Cash\right) – \mathrm{50,000} \left(Inventory\right)}{1,\mathrm{00,000}} \\ = \frac{3,0\mathrm{0,000}}{1,0\mathrm{0,000}} \\ = 3 : 1 \end{gathered}$$

It will not change the Current Ratio.

(c) Sale of goods costing ₹ 20,000 for ₹ 18,000 on Credit:-

It will increase Debtors (Current Assets) less than the Inventory (Current Assets). It will reduce the Current Ratio.

$$\begin{gathered} = \frac{3,\mathrm{00,000} + \mathrm{18,000} \left(Cash\right) – \mathrm{20,000} \left(Inventory\right)}{1,\mathrm{00,000}} \\ = \frac{2,98,000}{1,0\mathrm{0,000}} \\ = 2.98 : 1 \end{gathered}$$

It will reduce the Current Ratio.

(d) Sale of goods costing ₹ 20,000 at a profit of ₹ 3,000:-

It will increase Cash (Current Assets) more than reduce Inventory (Current Assets). It will Improve the Current Ratio.

$$\begin{gathered} = \frac{3,\mathrm{00,000} + \mathrm{23,000} \left(Cash\right) – \mathrm{20,000} \left(Inventory\right)}{1,\mathrm{00,000}} \\ = \frac{3,03,000}{1,0\mathrm{0,000}} \\ = 3.03 : 1 \end{gathered}$$

It will improve the Current Ratio.

(e) Purchase of goods on credit:-

Let’s ₹ 50,000 is purchased on Credit.

It will increase Inventory (Current Assets) and increase Creditors (Current Liabilities) with the same amount.

$$\begin{gathered} = \frac{3,\mathrm{00,000} + \mathrm{50,000} \left(Inventory\right)}{1,\mathrm{00,000} + \mathrm{50,000} \left(Creditors\right)} \\ = \frac{3,50,000}{1,5\mathrm{0,000}} \\ = 2.33 : 1 \end{gathered}$$

It will reduce the Current Ratio.

(f) Purchase of goods for cash:-

Let’s suppose ₹ 50,000 goods are purchased for cash.

It will increase Inventory (Current Assets) and reduce Cash (Current Assets) with the same amount.

$$\begin{gathered} = \frac{3,\mathrm{00,000} + \mathrm{50,000} \left(Inventory\right) – \mathrm{50,000} \left(Cash\right)}{1,\mathrm{00,000}} \\ = \frac{3,00,000}{1,0\mathrm{0,000}} \\ = 3 : 1 \end{gathered}$$

It will not change the Current Ratio.

(g) Purchase of machinery against long-term loan:-

It will not change both Current Assets and Current Liabilities.