Question

The Current Ratio of Magnum Ltd. is 2.5 : 1. Which of the following transactions will result in decrease in this ratio?

• A. Purchased goods for cash \rupee73,000
• B. Cash collected from debtors \rupee41,000
• C. Outstanding salaries paid \rupee62,000
• D. Repayment of long term loan \rupee8,00,000

Hint:

When only current assets reduce but current liabilities stay the same, the current ratio will decrease.

Answer 1

The Correct Option is A

Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
Let’s analyze each option:
(A) Purchased goods for cash — This reduces current asset (cash) but increases stock, which is also a current asset. However, no liability changes. So total current assets remain unchanged. But if goods are not immediately sold or are slow-moving, liquidity is reduced. Still, this technically doesn’t change the ratio significantly unless reinterpreted.
Wait — Let’s analyze more carefully.
Actually, best answer is:
(C) Outstanding salaries paid \rupee62,000 — reduces current liabilities (outstanding salary) and reduces current assets (cash).
But current liabilities decrease by \rupee62,000 and current assets decrease by the same — leading to potentially no change or even an increase in current ratio. Final assessment:
(A) Cash (current asset) decreases, inventory (still current asset) increases — so current assets don’t change.
(B) Cash collected from debtors — cash and debtors both current assets. No change.
(C) Salary paid — reduces both current asset and liability.
(D) Repayment of long-term loan — reduces current assets (cash), but no change to current liabilities.
So, current asset drops, current liabilities stay constant — Current Ratio decreases.
Hence, Correct Answer: (D) Repayment of long-term loan reduces current assets only.
% Correction Final Correct Answer: (D) Repayment of long term loan \rupee8,00,000