Question

The current ratio of a firm is 2 : 1. If the firm purchased goods on credit, then how will it affect its current ratio?

• A. Improve
• B. Reduce
• C. No change
• D. The ratio will increase for some time and reach its highest point.

Hint:

Both current assets (stock) and current liabilities (creditors) rise by the same amount, so a ratio above 1 falls.

Answer 1

The Correct Option is B

Step 1: General proof:
Let current liabilities be L, so current assets are 2L. Let goods worth x be bought on credit. The new ratio is (2L + x) / (L + x).

Step 2: Compare with 2:
Now 2(L + x) = 2L + 2x, which is more than 2L + x when x is positive. So (2L + x) / (L + x) is less than 2.

Step 3: Meaning:
The ratio has fallen below 2 : 1, so it reduces. It moves toward 1 : 1 as x grows.

Step 4: Options:
Improve and No change are false. The last option is not supported by the working. So option 2 stands.

Final Answer:
The ratio reduces. \[\boxed{\text{Reduce}}\]