12th | Accounting Ratios | Question No. 26 To 30 | Ts Grewal Solution 2022-2023

Working Capital   `  3,60,000; Total :Debts   ` 7,80,000; Long-term Debts  ` 6,00,000; Inventories   ` 1,80,000. Calculate Liquid Ratio.

Current Liabilities = Total Debts − Long-term Debts

= 7,80,000 − 6,00,000 = 1,80,000

Current Assets = Current Liabilities + Working Capital

= 1,80,000 + 3,60,000 = 5,40,000

Quick Assets = Current Assets − Stock

= 5,40,000 − 1,80,000 = 3,60,000

Current ratio= Quick assets/Current liabilities=3,60,000/1,80,000=2:1

 

Quick Ratio of a company is 2:1. State giving reasons, which of the following transactions would (i) improve, (ii) reduce, (iii) Not change the Quick Ratio:
(a) Purchase of goods for cash; (b) Purchase of goods on credit; (c) Sale of goods (costing  `20,000) for  `20,000; (d) Sale of goods (costing  `20,000) for  `22,000; (e) Cash received from Trade Receivables.

Quick Ratio = 2:1

Let Quick Assets be =  ` 40,000

Current Liabilities =  ` 20,000

(a) Purchase of goods for Cash- Reduce

Reason: This transaction will result decrease in cash and increases in stock. Liquid Asset will decrease due payment for goods purchased.

Example: Purchase of goods  ` 10,000 for cash

Quick Assets = 40,000 − 10,000 (Cash) =  ` 30,000

 

Quick ratio (After purchase of Assets)= (40,000-10,000)/20,000=1.5:1

 

(b) Purchase of goods on Credit- Reduce

Reason: Purchase of goods on credit will result increase in Current Liabilities and no change in Quick Assets.

Example: if Purchase of goods on Credit `10,000

Current Liabilities = 20,000 + 10,000 (Creditors) = `30,000

Quick ratio (After purchase of goods on credit)= 40,000/(20,000+10,000)=1.33:1

 

(c) Sale of goods for  ` 20,000- Improve

Reason: Sale of goods will result in increase in Quick Assets by the amount of  ` 40,000 in the form of either in cash or debtor. This transaction will result no change in current liabilities.

Quick ratio (After sale of goods)= (40,000+20,000)/20,000=3:1

 

(d) Sale of goods costing  ` 20,000 of or  ` 22,000- Improve

Reason: This transaction will increase the Quick Assets by  ` 22,000 in the form of either in cash or debtors but no effect on the Current Liabilities.

Quick Assets after sale of goods = 40,000 + 22,000 =  ` 62,000

Quick Ratio after sale of goods= (40,000+22,000)/20,000=3.1:1

(e) Cash received from debtors- No change

Reason: This transaction results increase in one quick asset in the form of cash and decrease in other quick asset in the form of debtor with equal amount. Therefore it result in no change in the total of Quick Assets.

Example: Cash received from debtors `10,000

Quick Assets = 40,000 + 10,000 (Cash) − 10,000 (Debtors) = 40,000

Quick ratio (After cash received from debtors)

= (40,000-10,000+10,000)/20,000=2:1

 

 Quick Ratio of Z Ltd. is 1:1. State, with reason, which of the following transactions would (i) Increase (ii) Decrease or (ii) Not change the ratio.

(a) Included in the trade payables was bill payable of 3,000 which was met on maturity;

(b) Debentures of 50,000 were converted into equity shares.

(CBSE 2014)

Transaction	Impact
Paid a bills payable  ` 5,000 on maturity	As cash is going out, quick assets are decreasing by 3,000 and same amount is decreasing from current liabilities. So, quick ratio will not change.
Converted Debentures into Equity shares	As Debenture and Equity shares are not the part of Quick assets and Current liabilities. So, quick ratio will not change.

 

The Quick Ratio of a company is 0.8:1. State with reason, whether the following transactions will increase, decrease or not change the Quick Ratio:
(i) Purchase of loose tools for  `2,000; (ii) Insurance premium paid in advance  `500; (iii) Sale of goods on credit  `3,000; (iv) Honoured a bills payable of  `5,000 on maturity.

Transaction	Impact
Purchase of loose tools  ` 2,000	As cash is going out, quick assets are decreasing by 2,000. So, quick ratio will decrease.
Insurance premium paid in advance  ` 500	As cash is going out, quick assets are decreasing by 500. So, quick ratio will decrease.
Sale of goods on credit  ` 3,000	As debtors increase, quick assets also increase by 3,000. So, quick ratio will increase.
Honoured a bills payable  ` 5,000 on maturity	As cash is going out, quick assets are decreasing by 5,000 and since bill is honoured current liabilities are decreasing. Thus, quick ratio will decrease.

 

Venus Limited's Inventory is  `3,00,000. Total Liquid Assets are  `12,00,000 and Quick Ratio is 2:1. Work out Current Ratio.

Quick ratio = Quick Assets/Current assets=2:1

Quick Assets = 12,00,000

Current liabilities Quick assets/2=12,00,000/2=6,00,000

Current Assets = Quick Assets + Stock

= 12,00,000 + 3,00,000 = 15,00,000

Current ratio= Current assets / Current liabilities=15,00,000/6,00,000=2.5:1