Why should I choose AnalystNotes?

AnalystNotes specializes in helping candidates pass. Period.

Find out more

Basic Question 4 of 6

A company with a 2.0 current ratio will experience a decline in the current ratio when a short-term liability is paid. True or False?
Check Answer Previous Q Next Q Print

User Contributed Comments 4

User Comment
viannie if current ratio>1.0, then a payment for short term liability will increase the current ratio

if current ratio<1.0, then payment for short term liability will decrease the current ratio

try out an example and you will get it.
Beret Why do current assets decrease by a smaller percentage than current liabilities. Isnt it 1:1?
copus Do the maths - its is real simple- Assume that Current assets = 100 and current liabilities = 50. The current ratio is 2. The company then uses 2 of cash to pay 2 of liabilities. The current ratio is now 98/48 = 2.04. In other words the CR has increased.
cleopatraliao thanks copus:D
You need to log in first to add your comment.
I used your notes and passed ... highly recommended!
Lauren

Lauren

Learning Outcome Statements

calculate and interpret activity, liquidity, solvency, and profitability ratios

describe relationships among ratios and evaluate a company using ratio analysis

CFA® 2025 Level I Curriculum, Volume 3, Module 11.