Question

The Quick Ratio of a company is 1 : 1. Which of the following transactions will result in increase in Quick Ratio?

• A. Sold goods on credit
• B. Cash received from debtors
• C. Purchased goods on credit
• D. Purchased goods on cash

Hint:

To analyze the effect of a transaction on a ratio:
1. Write the ratio formula (Quick Ratio = QA / CL).
2. Note the initial state (e.g., QA = CL).
3. Identify how the transaction affects the numerator (QA) and the denominator (CL).
4. Determine the net effect on the ratio (increase, decrease, no change). Quick Assets typically include Cash, Bank, Marketable Securities, Debtors, Bills Receivable.

Answer 1

The Correct Option is B

To solve the problem, we need to determine which of the following transactions will result in an increase in the Quick Ratio, given that the Quick Ratio of the company is 1:1.

1. Understanding the Quick Ratio:
The Quick Ratio is calculated using the formula:
Quick Ratio = (Current Assets - Inventories) / Current Liabilities
It measures a company's ability to pay off its current liabilities without relying on the sale of inventory. The components of the quick ratio are cash, receivables, and marketable securities. Therefore, the transactions that affect this ratio must involve these components.

2. Analyzing Each Transaction:

• (A) Cash received from debtors: This will increase the company's cash balance, which is a quick asset. Thus, it will increase the Quick Ratio. Correct.
• (B) Sold goods on credit: This increases accounts receivable, which are part of current assets. However, it doesn't immediately affect cash, so it will not change the Quick Ratio. Incorrect.
• (C) Purchased goods on credit: This increases current liabilities but does not affect the quick assets (cash, receivables). Hence, it will not increase the Quick Ratio. Incorrect.
• (D) Purchased goods on cash: This decreases cash, which directly lowers the quick assets, thus reducing the Quick Ratio. Incorrect.

Final Answer:
Correct Option: (B) Cash received from debtors