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Accounting Ratios 3.33
(iii) Purchase of computer on credit of 2 months;
(iv) Purchase of building by issuing debentures;
(v) Revenue from Operations, i.e., Sale of goods for ` 20,000 on credit of 1 month
(Cost of Goods Sold ` 15,000);
(vi) Cash collected from debtors;
(vii) Cash paid to creditors;
(viii) Payment of outstanding liabilities;
(ix) Sale of goods for cash ` 20,000 (Cost ` 24,000);
(x) Issue of shares for cash;
(xi) Bills receivable drawn on debtors for 2 months; and
(xii) Bills receivable collected at maturity.

Solution: Statement Showing the Effect of Different Items on Current Ratio
Transactions Effect on Current Ratio Reason
(i) Improve Repayment of long-term loans will reduce Cash and Cash Equivalents, i.e.,
current assets and, current liabilities with the amount paid. Therefore, Current
Ratio will improve.
(ii) Decline Goods purchased on credit will increase inventory, i.e., current assets and also
current liabilities by the same amount. In effect, Current Ratio will decline.
(iii) Decline Purchase of computer on credit which will be paid within 2 months will increase
current liabilities. However, current assets will not change. Therefore, Current
Ratio will decline.
(iv) No change Purchase of building by issuing debentures will not affect current assets or
current liabilities. Therefore, Current Ratio will not change.
(v) Improve Credit Sale of goods at a profit will increase current assets. However, current
liabilities will remain same. Therefore, Current Ratio will improve.
(vi) No change Cash collected from debtors will not change current assets because one current
asset will be replaced by another. Besides, current liabilities will remain same.
Therefore, Current Ratio will not change.
(vii) Improve Cash paid to creditors will reduce current assets and current liabilities by the
same amount. Therefore, Current Ratio will improve.
(viii) Improve Payment of outstanding liabilities will reduce current assets and current
liabilities. Therefore, Current Ratio will improve.
(ix) Decline Sale of goods at a loss will reduce current assets but current liabilities will
remain same. Therefore, Current Ratio will decline.
(x) Improve Issue of shares for cash will increase current assets but current liabilities will
remain same. Therefore, Current Ratio will improve.
(xi) No change Bills receivable drawn on debtors will not change current assets because
one current asset will be replaced by another. Therefore, it will not change
the Current Ratio.
(xii) No change Bills receivable collected at maturity will not change current assets because
one current asset will be replaced by another. Therefore, Current Ratio will
not change.