IGCSE Accounting Paper-2: Specimen Questions with Answers 111 - 111 of 189

Indicate with a tick whether the following transactions would increase, decrease or not alter the working capital ratio of Aparajita. (Marks 6)

Explanation

Transactions Would Increase

Transactions	Change in Working Capital Ratio
	Increase	Decrease	Unaltered
(I) Cash collected from trade receivables
(II) Sale of inventory on credit at par
(III) Expiry of prepaid expenses
(IV) Purchase of goods for cash
(V) Payment to Trade payables
(VI) Purchase of goods on credit

• One current asset (trade receivables) is being converted into another current asset (cash) . Neither the total current assets nor the total current liabilities are changed. So, working capital ratio will also remain the same.
• One current asset (inventory) is being converted into another current asset (receivables) by the same amount as the sale is at par. Neither the total current assets nor the total current liabilities are changed. So, working capital ratio will also remain the same.
• Prepaid expense is a current asset till its expiry. On expiry, its balance is written off. Expiry of prepaid expenses will reduce current assets and hence the working capital ratio.
• One current asset (cash) is being converted into another current asset (stock) . Neither the total current assets nor the total current liabilities are changed. So, working capital ratio will also remain the same.
• Payment to Trade payables reduces a current liability (trade payables) as well as a current asset (cash) by the same amount. The net effect of this is that working capital ratio is increased.
• Purchase of goods on credit increases a current asset (stock) as well as a current Liability (trade payables) by the same amount. The net effect of this is that working capital ratio is decreased.