Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881



Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem

Which of the following transactions would cause the current ratio to increase (assuming the current ratio is currently greater than 1)?

a. Purchased inventory on credit.

b. Purchased property, plant, and equipment for cash.

c. Received money from a customer related to an accounts receivable.

d. Paid off a payable.

To determine

Concept introduction:

Current Ratio:

Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

Current Ratio=Current assetsCurrent liabilities

To choose:

The correct option which will result in increase in the current ratio.


Explanation for correct answer:

Paying off a payable will result in decrease in current liability and current assets with same amount; It will result in increase in current ratio (which is > 1 currently). Hence the correct option is d.

Explanation for incorrect answers:

a. Purchase of inventory will result in decrease in the current ratio...

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