Tag: liquidity ratios

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Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Purchase of inventory on credit will cause the quick ratio to               .

  1. increase

  2. decrease

  3. remain unchanged

  4. none of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Quick Ratio = [Current assets minus Inventory] / Current liabilities

Let Current assets = $Rs. 100000$, Inventory = $Rs. 20000$ and Current liabilities = $Rs. 40000$
 So Quick Ratio = [$100000-20000] / 40000$ = $2 : 1$
Now let inventory purchased on credit be $Rs. 20000$, so revised Inventory = $Rs. 60000$ and Current liabilities = $Rs. 60000$
Revised Quick Ratio =[$100000-60000] / 60000$ = $2 : 3$
So , Purchase of inventory on credit will cause the quick ratio to decrease.

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Which of the following transactions will change the current ratio?

  1. Purchase of goods for cash.

  2. Plant acquired on account.

  3. Sold goods on credit.

  4. Debentures converted into equity capital.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
  1. When goods are purchased for cash the stock would increase and the cash balance would decrease and so there would be no effect on the current ratio.
  2. When plant is acquired on account the fixed asset would increase and there would be increase in the creditors amount, hence the current ratio would decrease.
  3. When goods are sold on credit the stock would decrease and the debtors would increase and hence there would be no effect on current ratio.
  4. When debentures are converted into equity capital there would be no changes in current assets and current liabilities  and so no change in current ratio.
Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

The immediate solvency ratio is                 .

  1. quick ratio

  2. current ratio

  3. stock turnover ratio

  4. debtor turnover ratio
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Quick Ratio = [Current Assets- Inventory] / [Current liabilities - Bank Overdraft and Cash credit]

While calculating quick ratio we reduce the amount of inventory as it is less liquid than the other current assets. The reason to reduce the amount of bank overdraft and cash credit is that mostly these are secured against inventory. So quick ratio gives us an immediate solvency ratio and is a much more conservative ratio than current ratio.

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Current ratio is increased by :
1) Issue of redeemable debentures.
2) Selling of old machine for cash.
3) Converting debentures into equity capital.
4) Cash received from debtors.

  1. 1, 2 and 4

  2. 3 and 4

  3. 1 and 2

  4. 4 only
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Current ratio = Current assets/ Current liabilities

  1. When Redeemable debentures are issued, long term liabilities and the current assets increase,while  the current liabilities remain constant so  the current ratio would increase.
  2. When old machine is sold for cash, fixed assets would decrease and the current assets would increase, while  the current liabilities remain constant so  the current ratio would increase.
  3. When debentures are converted into equity capital there would be no changes in the current assets and the current liabilities and ultimately no change in the current ratio.
  4. When cash is received from debtors there would be no net changes on the current assets as the cash balance would increase and the debtors balance would decrease by the same amount and hence there would no change in the current ratio.

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Current ratio may be increased by                    .

  1. Overstating the current assets

  2. Overstating the current liabilities

  3. Understating current assets

  4. None of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Current ratio = Current assets/ current liabilities

So when current assets = $Rs 150000$ and current liabilities = $Rs. 100000$ then,
Current ratio = $100000 / 50000$
                       = $2 : 1$
Now if we overstate the current assets by $Rs. 50000$ then ,
Revised Current ratio = $150000/50000$
                                     = $3: 1 $
So, the current ratio may be increased if we overstate the current assets. 

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Given current ratio = $2.5$
Quick ratio = $1.5$
Net working capital = Rs $30,000$
What is the amount of current liabilities?

  1. $Rs20,000$

  2. $Rs30,000$

  3. $Rs50,000$

  4. $Rs60,000$
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation
Net working capital = Current assets - Current liabilities
$Rs. 30000$ = Current assets - Current liabilities
Therefore, Current assets = Current liabilities + $Rs. 30000$
Current ratio = Current assets/ Current liabilities
$2.5$ = [Current liabilities + $Rs. 30000$] / Current liabilities
 $2.5$ Current liabilities  = Current liabilities + $Rs. 30000$
Current liabilities = $Rs. 30000/ 1.5$
Therefore, Current liabilities = $Rs. 20000$
Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Given current ratio = $2.5$
Quick ratio = $1.5$
Net working capital = Rs $30,000$
What is the amount of quick assets?

  1. $Rs 20,000$

  2. $Rs 30,000$

  3. $Rs 50,000$

  4. $Rs 60,000$
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
Net working capital = Current assets - Current liabilities
$Rs. 30000$ = Current assets - Current liabilities
Therefore, Current assets = Current liabilities + $Rs. 30000$
Current ratio = Current assets/ Current liabilities
$2.5$ = [Current liabilities + $Rs. 30000$] / Current liabilities
 $2.5$ Current liabilities  = Current liabilities + $Rs. 30000$
Current liabilities = $Rs. 30000/ 1.5$
Therefore, Current liabilities = $Rs. 20000$
Now,
Current assets = Current liabilities + $Rs. 30000$
                          = $Rs.20000 + Rs. 30000$
                          =$Rs. 50000$
Now, Quick Ratio = Quick Assets/ Current liabilities
                     $1.5$   = Quick Assets/ $20000$
Therefore,
                  Quick Assets = $Rs. 30000$
Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Current liabilities of a company were Rs. 1,75,000 and its current ratio was 2: 1. It paid Rs. 30,000 to a creditor. Calculate current ratio after payment :

  1. 2: 1

  2. 1: 1

  3. 1: 5: 1

  4. 2.21: 1
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Given,
Current liabilities = Rs-1,75,000
Current Ratio = 2:1

If 30,000 is paid to a creditor it will reduce both current assets as well as current liabilities as cash is being paid and creditors are reduced. Hence, new ratio will be:- 

Current Ratio = Current Assets
                       -------------------------     
                        Current liabilities

                      =  3,50,000 (WN 1) - 30,000

                         --------------------------------------
                           1,75,000 - 30,000
                      = 3,20,000
                          --------------
                          1,45,000
                     = 2.2 : 1

Working note 1) = Current assets 
Current Ratio = Current Assets

                       -------------------------     
                        Current liabilities
Current Assets = Current liabilities x current ratio 
                         = 1,75,000 x 2
                         = 3,50,000.