Students often get this question in their exams as to ‘What is the effect of a transaction on the given ratio?’
Generally, this question is asked in case of Current Ratio, Quick Ratio and Debt Equity Ratio. They get confused. Moreover, they have to manage time also.
Here are the short tricks to judge the effect of a transaction on the given ratio:
Ratio = Numerator/ Denominator R =N/D
Case 1: There is change in only numerator or denominator (N or D).
Change in Numerator →Ratio moves in same direction (N→R).
Change in Denominator →Ratio moves in opposite direction {D→(-R)}
Case 2: There is equal amount of change in both (N and D).
There are further three situations:
Situation 1: When Numerator < Denominator (N<D)
If both increase/decrease by the same amount, Ratio changes in the same direction.
Situation 2: When Numerator = Denominator(N=D)
If both increase/decrease by the same amount, Ratio does not change.
Situation 3: When Numerator > Denominator(N>D)
If both increase/decrease by the same amount, Ratio changes in the opposite direction.
Case 3: When there is unequal change in both (N and D).
First, check in which Numerator or Denominator, the change is more.
If change in Numerator is more than change in Denominator, Ratio will follow the same direction.
If change in Denominator is more than change in Numerator, Ratio will follow the opposite direction.
Try using this mathematical trick and you will learn to save time, doing this question correctly.