# 12th | Ts grewal 2021-2022 Question 11 to 15 | ch:4 Accounting Ratios

#### Question 11:Current Liabilities of a company were `1,75,000 and its Current Ratio was 2: 1. It paid `30,000 to a Creditor. Calculate Current Ratio after payment.

Current Ratio= 2:1 before payment to Creditor

Current Liabilities = `1,75,000 before payment to Creditor

Current Assets = (`1,75,000×2)=3,50,000 before payment to Creditor

Current Ratio After payment to Creditor

=3,50,000-30,000/1,75,000-30,000

Current Ratio = 3,20,000/1,45,000

Current Ratio = 2.21/1

#### Question 12:

Ratio of Current Assets (`3,00,000) to Current Liabilities ( `2,00,000) is 1.5:1. The accountant of the firm is interested in maintaining a Current Ratio of 2:1 by paying off a part of the Current Liabilities. Compute amount of the Current Liabilities that should be paid so that the Current Ratio at the level of 2:1 may be maintained.

Current ratio= Current assets/Current liabilities=1.5:1

The company is interested in maintaining the Current Ratio of 2:1 by paying off the liability.

Let the liability paid-off by the company = x

New Current Assets = 3,00,000x

New Current Liabilities = 2,00,000x

New Current ratio= 3,00,000-x/2,00,000-x=2:1

Or 3,00,000-3x=4,00,000-2x

Or 1,00,000

Therefore, liability of `1,00,000 need to be paid-off by the company in order to maintain the Current Ratio of 2 : 1.

#### Ratio of Current Assets ( `8,75,000) to Current Liabilities ( `3,50,000) is 2.5:1. The firm wants to maintain Current Ratio of 2:1 by purchasing goods on credit. Compute amount of goods that should be purchased on credit.

Current Assets =  ` 8,75,000
Current Liabilities =
` 3,50,000
Current Ratio = 2.5:1
The business is interested to maintain its Current Ratio at 2:1 by purchasing goods on credit.
Let the amount of goods purchased on credit be ‘x’
Current Liabilities =
` 3,50,000 + x
Current Assets =
` 8,75,000 + x

Current ratio= Current assets/Current liabilities=8,75,,000+x/3,50,000+x=2/1

8,75,000 + x = 7,00,000 + 2x
8,75,000 – 7,00,000 = 2x – x
1,75,000 = x

Therefore, goods worth
` 1,75,000 must be purchased on credit to maintain the current ratio at 2:1.

#### Question 14:

A firm had Current Assets of  `5,00,000. It paid Current Liabilities of  `1,00,000 and the Current Ratio became 2:1. Determine Current Liabilities and Working Capital before and after the payment was made.

Firm disposed off liabilities of  ` 1,00,000 which results in decrease in current liabilities and current assets by the same amount.
After disposing liabilities:
Current Assets =
` 4,00,000 ( ` 5,00,000 –  ` 1,00,000)
And, Let Current Liabilities be (x –
` 1,00,000)

Current ratio= Current assets/Current liabilities=4,00,000/x-1,00,000=2:1

4,00,000 = 2x – 2,00,000
6,00,000 =  2x
Therefore, x = 3,00,000

Current Liabilities after payment = x –
` 1,00,000 =  ` 2,00,000

Working Capital after Payment = Current Assets – Current Liabilities
=
` 4,00,000 –  ` 2,00,000 =  ` 2,00,000

Current Assets before payment =
` 5,00,000
Current Liabilities before Payment =
` 3,00,000
Therefore, Working Capital Before Payment = Current Assets – Current Liabilities
=
` 5,00,000 –  ` 3,00,000 =  ` 2,00,000

#### Question 15:

State giving reason, whether the Current Ratio will improve or decline or will have no effect in each of the following transactions if Current Ratio is 2:1:
(a) Cash paid to Trade Payables.
(b) Bills Payable discharged.
(c) Bills Receivable endorsed to a creditor.
(d) Payment of final Dividend already declared.
(e) Purchase of Stock-in-Trade on credit.
(f) Bills Receivable endorsed to a Creditor dishonoured.
(g) Purchases of Stock-in-Trade for cash.
(h) Sale of Fixed Assets (Book Value of  `50,000) for
`45,000.
(i) Sale of Fixed Assets (Book Value of  `50,000) for
`60,000.

Let’s assume Current Assets as  ` 2,00,000 and Current Liabilities as  ` 1,00,000
Current Ratio=Current Assets/Current Liabilities

Current Ratio=2,00,000/1,00,000=2:1

(a) Cash paid to Trade Payables (say
` 50,000)

Current Ratio =2,00,000−50,000/1,00,000−50,000=3:1 (Improve)

(b) Bills Payable discharged (say
` 50,000)

Current Ratio = 2,00,000−50,000/1,00,000−50,000=3:1 (Improve)

(c) Bills Receivable endorsed to a creditor (say
` 50,000)

Current Ratio =2,00,000−50,000/1,00,000−50,000=3:1 (Improve)

(d) Payment of final Dividend already declared (say
` 50,000)

Current Ratio =2,00,000−50,000/1,00,000−50,000=3:1 (Improve)

(e) Purchase of Stock-in-Trade on credit (say
` 50,000)

Current Ratio =2,00,000+50,000/1,00,000+50,000=1.67:1 (Decline)

(f) Bills Receivable endorsed to a Creditor dishonoured (say
` 50,000)

Current Ratio =2,00,000+50,000/1,00,000+50,000=1.67:1 (Decline)

(g) Purchase of Stock-in-Trade for cash (say
` 50,000)

Current Ratio =2,00,000+50,000−50,000/1,00,000=2:1 (No effect)

(h) Sale of Fixed Assets (Book value of
` 50,000) for  ` 45,000

Current Ratio=2,00,000+45,000/1,00,000=2.45:1 (Improve)

(i) Sale of Fixed Assets (Book value of
` 50,000) for  ` 60,000

Current Ratio =2,00,000+60,000/1,00,000=2.6:1 (Improve)