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

Passage

The assets and liabilities of Aparajita՚s business included the following:

The Assets and Liabilities of Aparajita՚S Business Included
$
(I) Cash1500
(II) Unearned Income2000
(III) Trade Receivables10000
(IV) Inventory15000
(V) Prepaid Expenses4000
(VI) Trade Payables6000
(VII) Bank Overdraft5500

Question 111 (1 of 5 Based on Passage)

Write in Short

Short Answer▾

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

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

Explanation

Transactions Would Increase
TransactionsChange in Working Capital Ratio
IncreaseDecreaseUnaltered
(I) Cash collected from trade receivables
The Right Click
(II) Sale of inventory on credit at par
The Right Click
(III) Expiry of prepaid expenses
The Right Click
(IV) Purchase of goods for cash
The Right Click
(V) Payment to Trade payables
The Right Click
(VI) Purchase of goods on credit
The Right Click
  • 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.

🎯 Select Paper

Developed by: