Question

3.
A transaction involving an increase in current ratio but no change in working capital:​

Answer 1

Answer:

Receiving payment from a debtor. or

Inventory sold for cash will increase quick ratio while current ratio will remain unchanged.

Explanation:

The quick ratio does not include accounts receivable because generally accounts receivable takes > 1 month to turn into cash. But it does include cash, so converting accounts receivable to cash increases the quick ratio.

Both cash and accounts receivable effect the current ratio, but because you’re changing from one to the other, the net effect on the current ratio will be nothing.

Answer 2

Answer:

Payment of Current Liability.

Explanation:

Current Ratio-

• The current ratio compares a company's total current assets to its total current liabilities.
• These are typically defined as cash assets or assets that will be converted to cash in a year or less, and liabilities that will be paid in a year or less.
• Current Ratio = Current Assets / Current Liability

Working Capital -

• The difference between a company's current assets and current liabilities is represented by working capital, also known as net working capital.
• Working capital is a metric that measures a company's liquidity and short-term financial health.
• Working Capital = Current Assets - Current Liabilities

In the above example,

Suppose the current asset is 20000 and current liability is 10000. Payment to Creditors is 5000, then

Current Ratio will be, (20000-5000) /  (10000-5000) = 3

Working Capital will be , (20000-5000) - (10000-5000) = 10000

Hence, here the current ratio has increased while there is no change in the working capital.

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