Question

Question 3. What will be the impact of “cash paid to trade payables” on

a current ratio of 1.8:1? State the reason.​

Answer 1

Explanation:

state giving reasons which of the following transactions would improve reduce or not change the current ratio, if current raito of a c company is (i)1:1 or (ii) 0.8:1 <br> (a) cash paid to trade payables <br> (b) purchase of stock in trade on credit <br> (c ) purchase of stock in trade ffor cash <br> (d) payment of divident payable <br> (e ) bills payable discharged <br> (f) bills receivable endorsed to a creditro <br> (g) bills receivable endorsed to a creditor dishonoured.

Answer 2

Answer:

The Current Ratio will improve.

Explanation:

Current Ratio-

• A company's total current assets are compared to its total current liabilities in the current ratio.
• 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, are typically defined as these.
• The current ratio allows investors to gain a better understanding of a company's ability to cover short-term debt with current assets and compare it to competitors and peers.
• Current Ratio = Current Assets / Current Liabilities.

In the Question given above-

• Cash is a Current Asset, when cash is paid to Trade Payables the amount of cash paid from the current asset will reduce.
• Trade Payables are Current Liabilities, when cash is paid to trade payables, the amount of trade payables get reduced with the same amount.
• Now, when in a ratio, the numerator and denominator get reduced by same number, the ratio is tend to improve.
• For example,

                              CR = 1.8 : 1

                              Cash paid to trade payables= 8000

                              Current asset = 18000

                              New CR = (18000-8000) / (10000-8000) = 5:1

Hence, the current ratio will improve from 1.8 : 1  when the cash is paid to the trade payables.

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