Question

All of the following regarding the current ratio are true except: Multiple Choice Current ratio is calculated by dividing current assets by current liabilities. Current ratio helps to assess a company's ability to pay its debts in the near future. Current ratio does not affect a creditor's decision on whether to allow a company to buy on credit. Current ratio can affect a creditor's decision about whether to lend money to a company. Current ratio can reveal challenges in covering short-term obligations if it is less than 1.

Answer 1

Answer:

Current ratio does not affect a creditor's decision on whether to allow a company to buy on credit.  This Statment is False.

Explanation:

If the current ratio is below 1 or near 1 then a creditor may not be interest in doing trade credit becasue, there is a risk for the debt to default, or it may do it but with a higher interest yield.

Answer 2

Answer:

Current ratio does not affect a creditor's decision on whether to allow a company to buy on credit

Explanation:

Current ratio is a liquidity tool used  by a company to evaluate its ability to meet up with short term financial obligations.

It is always a first point of call to investors , creditors and analyst so as to evaluate the risks involved in a potential transaction.

The statement " Current ratio does not affect a creditor's decision whether to allow a company to buy on credit " is not true as it can give an insight into the ability of the buying company to pay as at when due , hence the possibility of bad debts are reduced.