Question

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.A) Cash purchase of inventoryB) Cash payment on an account receivableC) Cash payment of an account payableD) Credit sale of inventory at costE) Cash sale of inventory at a loss

Answer 1

Answer:

C) Cash payment of an account payable

We know that the current ratio is greater than 1, and in the formula for current ratio the assets are in the numerator and liabilities in the denominator, in this case an asset is increasing for the same account that a liability is decreasing by. So whenever the the value is above one and the numerator and denominator are decreased by the same amount the value increases.

Explanation: