Question:
Current Ratio of Super Ltd. is 2:1. Which of the following transactions will result in a decrease in this ratio?
Current Ratio of Super Ltd. is 2:1. Which of the following transactions will result in a decrease in this ratio?
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Repayment of long-term liabilities reduces current assets while keeping current liabilities unchanged, leading to a decrease in the current ratio.
Updated On: Jan 27, 2025
- Payment of ₹ 40,000 to creditors
- Sale of furniture (book value ₹ 38,000) for ₹ 16,000 only
- Repayment of long-term loan of ₹ 7,00,000
- Cash collected from debtors ₹ 1,18,000
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The Correct Option is C
Solution and Explanation
The current ratio is the ratio of current assets to current liabilities.
1. Payment to creditors (₹ 40,000) reduces both current assets (cash) and current liabilities (creditors) proportionally, keeping the ratio unchanged.
2. Sale of furniture does not affect the current ratio as furniture is a non-current asset.
3. Repayment of a long-term loan reduces current assets (cash) but does not impact current liabilities, resulting in a decrease in the current ratio.
4. Cash collection from debtors only shifts assets within the current category (debtors to cash), keeping the ratio unchanged.
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