Question

The Quick Ratio of a company is 1 : 1. Which of the following transactions will result in increase in Quick Ratio?

• A. Cash received from debtors
• B. Sold goods on credit
• C. Purchased goods on credit
• D. Purchased goods on cash

Hint:

To analyze the effect of a transaction on a ratio:
1. Write the ratio formula (Quick Ratio = QA / CL).
2. Note the initial state (e.g., QA = CL).
3. Identify how the transaction affects the numerator (QA) and the denominator (CL).
4. Determine the net effect on the ratio (increase, decrease, no change). Quick Assets typically include Cash, Bank, Marketable Securities, Debtors, Bills Receivable.

Answer 1

The Correct Option is B

Step 1: Understand Quick Ratio:
Quick Ratio (or Acid-Test Ratio) = Quick Assets / Current Liabilities.
Quick Assets = Current Assets - Inventories - Prepaid Expenses.
Given Quick Ratio = 1:1, meaning Quick Assets = Current Liabilities. Let's assume QA = CL = Rs 1,00,000.
Step 2: Analyze Effect of Each Transaction:
(A) Cash received from debtors: Cash (Quick Asset) increases, Debtors (Quick Asset) decrease by the same amount. No change in total Quick Assets. Current Liabilities remain unchanged. Ratio remains 1:1.
(B) Sold goods on credit: Debtors (Quick Asset) increase. Inventories (Non-Quick Asset) decrease. Total Quick Assets increase. Current Liabilities remain unchanged. Numerator increases, denominator stays same. Ratio increases ($>$ 1:1).
(C) Purchased goods on credit: Inventories (Non-Quick Asset) increase. Creditors (Current Liability) increase. Quick Assets remain unchanged. Current Liabilities increase. Numerator stays same, denominator increases. Ratio decreases ($<$ 1:1).
(D) Purchased goods on cash: Inventories (Non-Quick Asset) increase. Cash (Quick Asset) decreases. Quick Assets decrease. Current Liabilities remain unchanged. Numerator decreases, denominator stays same. Ratio decreases ($<$ 1:1).
Conclusion:
Selling goods on credit increases Debtors (a quick asset) while decreasing Inventory (not a quick asset), thus increasing total Quick Assets. With Current Liabilities unchanged, the Quick Ratio increases.