Question : If the current ratio were 2:1, how the purchase of goods on credit will affect the current ratio?
Option 1: Decrease gross profit ratio
Option 2: Have no effect on the Current ratio
Option 3: Increase Current ratio
Option 4: Decrease the Current ratio
Correct Answer: Decrease the Current ratio
Solution :
Purchasing goods on credit decreases the current ratio as the current liability will increase due to the increase in creditor amount and assets will also increase with the same amount.
Like ratio is Current Asset = 200000 Current liability = 100000 Current ratio= 2:1
If the purchase of goods on credit for 100000 then
Current ratio = 300000/200000=1.5:1
Hence it will be declined.
Hence, the correct option is 4.
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