A company with a current ratio of 2.5:1 and quick ratio of 1:1 has current liabilities of Rs.26,00,000.Indicate how the following would affect the current ratio & quick ratio. Also state the amount by which the net working capital is affected. Treat each item separately. a) Purchase of raw materials on account of Rs.2,00,000 b) Collection of Rs.10,00,000 from customers c) Payment of bills by cheque Rs.3,00,000 (from the current account balance) d) What are your observations about impact of changes in current ratio or quick ratio on net working capital?

Sure, let's break down each item separately:

a) Purchase of raw materials on account of Rs.2,00,000

This will increase the current liabilities by Rs.2,00,000. The current ratio will decrease because the current liabilities increase while the current assets remain the same. The quick ratio will also decrease for the same reason. The net working capital will decrease by Rs.2,00,000 because the current liabilities have increased.

b) Collection of Rs.10,00,000 from customers

This will increase the current assets by Rs.10,00,000. The current ratio will increase because the current assets increase while the current liabilities remain the same. The quick ratio will also increase for the same reason. The net working capital will increase by Rs.10,00,000 because the current assets have increased.

c) Payment of bills by cheque Rs.3,00,000 (from the current account balance)

This will decrease the current assets by Rs.3,00,000. The current ratio will decrease because the current assets decrease while the current liabilities remain the same. The quick ratio will also decrease for the same reason. The net working capital will decrease by Rs.3,00,000 because the current assets have decreased.

d) Observations about impact of changes in current ratio or quick ratio on net working capital

The current ratio and quick ratio are both measures of a company's liquidity, or its ability to meet short-term obligations. The net working capital is also a measure of a company's short-term liquidity. Therefore, any changes in the current ratio or quick ratio will directly impact the net working capital. If the current ratio or quick ratio increases, the net working capital will also increase, indicating that the company has more assets relative to its liabilities. Conversely, if the current ratio or quick ratio decreases, the net working capital will also decrease, indicating that the company has more liabilities relative to its assets.