State the impact of redemption of debentures on the quick ratio of 1:1 with reasons
Dear Student,
The formula for caluculating Quick Ratio is :
Quick Assets Current Liabilites,
where,
Quick Assets = Current Assets - Inventories - Prepaid expenses,
Two scenarios are possible :
1) When the amount of debentures to be redeemed were not classified as current liability during the previous year (i.e debentures were classified under long-term liabilites):
In this case, the current assets stands reduced due to outflow of cash or bank, while the current liability position remains unchanged (no change).
Therefore, the quick ratio will reduce, which means the quick assets will be less than 1 times the current liability. This is becasue the amount in numerator will be lesser than the amount in denominator, so the ratio will automatically reduce from 1:1.
2) When the amount of debentures to be redeemed were classified as current liability during the previous year (i.e the outstanding amount will be treated as current liability since the amount to redeemed becomes due within 12 months) :
In this case, the decrease in current assets will be equal to the decrease in current liabiltiy. As the amount of debentures redeemed will result in equal cash outflow.
Hence, the the quick ratio will remain unaffected, it will remain the same 1:1.
Regards,
The formula for caluculating Quick Ratio is :
Quick Assets Current Liabilites,
where,
Quick Assets = Current Assets - Inventories - Prepaid expenses,
Two scenarios are possible :
1) When the amount of debentures to be redeemed were not classified as current liability during the previous year (i.e debentures were classified under long-term liabilites):
In this case, the current assets stands reduced due to outflow of cash or bank, while the current liability position remains unchanged (no change).
Therefore, the quick ratio will reduce, which means the quick assets will be less than 1 times the current liability. This is becasue the amount in numerator will be lesser than the amount in denominator, so the ratio will automatically reduce from 1:1.
2) When the amount of debentures to be redeemed were classified as current liability during the previous year (i.e the outstanding amount will be treated as current liability since the amount to redeemed becomes due within 12 months) :
In this case, the decrease in current assets will be equal to the decrease in current liabiltiy. As the amount of debentures redeemed will result in equal cash outflow.
Hence, the the quick ratio will remain unaffected, it will remain the same 1:1.
Regards,