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Basic Question 6 of 12
How would a company's current ratio be affected if a substantial amount of accounts payable were paid in cash?
B. The change would depend on the relationship between the payables liquidated and current liabilities.
C. It could increase, remain the same, or fall.
A. It would be unaffected since the transaction reduces the numerator and denominator by the same amount.
B. The change would depend on the relationship between the payables liquidated and current liabilities.
C. It could increase, remain the same, or fall.
User Contributed Comments 11
| User | Comment |
|---|---|
| kalps | If you have 5/4 to start with it would increase. If you hade 4/5 to start with it would decrease. |
| jamiejamie | The answer is C. It doesn't matter what the original relationship is between the numerator and the denominator for this question. If you subtract from the demominator you will always increase the ratio, even more so if you add to the numerator. Try subracting from the denominator in your calculator, you will always arrive at a bigger number. |
| gjwhite | If we assume assets > liabilities then the current ratio will increase since the percentage decrease in assets will be smaller than the percentage derease in liabilities. |
| Gina | jamiejamie: you don't add to the numerator because you pay the A/P with cash. Both numerator and denominator will decrease by the same amount. therefore it depends what the relationship btw CA and CL is CA/CL: 8/7 -> 7/6-> 6/5 current ratio increases CA/CL: 7/8 -> 6/7-> 5/6 current ratio decreases |
| chenyx | i agree with Gina |
| cbb1 | Answer is "increase" if Current Ratio is greater than 1.0, but answer is "fall" if Current Ratio is less than 1.0. Thus, the answer is it depends. |
| ramborob | Therefore, if the Current Ratio = 1 prior to the action, then it would equal 1 after the action as the reduction in Cash and the reduction in Payables is also equal. Hence, the answer should be B. Correct? |
| ramborob | Apologies, have just re-read answer B. It does not refer to the relationship between payables and cash. Answer C is correct! |
| itconcepts | If the starting ratio was exactly 1 then the ratio WONT change. |
| surob | very good question |
| leon121 | goooooooooooooood question. i made a dumb mistake of decreasing payables. but increasing assets. assets is decreasing because cash GOES OUT!!!!! i gots to be careful broh |
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Learning Outcome Statements
calculate and interpret common-size balance sheets and related financial ratios
CFA® 2025 Level I Curriculum, Volume 2, Module 3.