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

When current ratio is $2 : 1$, an equal increase in current assets and current liabilities would                .

  1. Increase the current ratio

  2. Decrease the current ratio

  3. No change in current ratio

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

When the current ratio is $2 : 1$ , an equal increase in current assets and current liabilities would decrease the current ratio. Let us understand this through an example;

Current Assets = $Rs. 100000$ and Current Liabilities = $Rs. 50000$
Current ratio = Current assets/ Current liabilities
                       = $100000/50000$
                       = $2 : 1 $ 
Now let us increase the current assets and current liabilities by $Rs. 50000$ and calculate the new current ratio ;
 Current ratio = $150000/100000$
                        = $1.5 : 1$.

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 stock?

  1. $Rs 20,000$

  2. $Rs 30,000$

  3. $Rs 50,000$

  4. $Rs 60,000$
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 = $Rs. 20000$
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 = $Rs. 30000$
Quick Ratio = Quick Assets/ Current liabilities
Quick Ratio = [Current Assets - Stock ]/ Current liabilities
            $1.5$ = [$50000$ - Stock] / $20000$
Stock = $50000 - 30000$
          = $Rs. 20000$
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 current 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
C 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 + $Rs. 30000$
                          = $Rs.20000 + Rs. 30000$
                          =$Rs. 50000$.