Question

Current Ratio of Super Ltd. is 2:1. Which of the following transactions will result in a decrease in this ratio?

• A. Payment of ₹ 40,000 to creditors
• B. Sale of furniture (book value ₹ 38,000) for ₹ 16,000 only
• C. Repayment of long-term loan of ₹ 7,00,000
• D. Cash collected from debtors ₹ 1,18,000

Hint:

Repayment of long-term liabilities reduces current assets while keeping current liabilities unchanged, leading to a decrease in the current ratio.

Answer 1

The Correct Option is C

The current ratio, defined as current assets divided by current liabilities, is affected by the following transactions: 1. Payment to creditors (₹ 40,000) impacts both current assets (cash) and current liabilities (creditors) equally, thus maintaining the ratio. 2. The sale of furniture, a non-current asset, has no effect on the current ratio. 3. Repaying a long-term loan decreases current assets (cash) but does not alter current liabilities, leading to a reduced current ratio. 4. Collecting cash from debtors merely reallocates assets within the current category (from debtors to cash), leaving the current ratio constant.