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CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

Anand Traders has a current ratio of 2:1 and net working capital of Rs 6,00,000. It uses Rs 2,00,000 of its cash to pay trade creditors. Its current ratio after this payment will be:

The current ratio becomes 2.5:1. Initially current liabilities are Rs 6,00,000 and current assets Rs 12,00,000. Paying Rs 2,00,000 to creditors reduces both, leaving assets of Rs 10,00,000 and liabilities of Rs 4,00,000. Net working capital stays at Rs 6,00,000 but the ratio rises.

  1. A2.50:1Correct
  2. B2.00:1
  3. C3.00:1
  4. D1.67:1

Explanation

With ratio 2:1 and NWC of 6,00,000, current liabilities are 6,00,000 and current assets 12,00,000. After paying creditors, current assets are 10,00,000 and current liabilities 4,00,000, so the ratio is 2.5:1. The 3.00 option reduces only liabilities (12/4), and the 1.67 option reduces only assets (10/6). The ratio does not stay at 2.00 because both sides fall by the same amount.

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