Question

Mork and Mindy firm’s current ratio is 2.5. Considered alone, which of the following actions would reduce the company’s current ratio? Borrow using short-term notes payable and use the proceeds to reduce accruals. Borrow using short-term notes payable and use the proceeds to reduce long-term debt. Use cash to reduce accruals. Use cash to reduce short-term notes payable. Use cash to reduce accounts payable.

Answer 1

Answer:

Option B Borrow using short-term notes payable and use the proceeds to reduce long-term debt

Explanation:

The formula for calculating current ratio is as under:

Current Ratio = Current Assets / Current Liabilities

Now the option which will either increase the current liability only (Denominator) or decrease the current assets only (Nominator) will be the right answer because the answer will decrease the current ratio.

Option B So if the company borrows money from its short term loan (current liabilities) to pay its long term debt which will increase its current liabilities and non-current liabilities. So in the nutshell will only increase the denominator (current liabilities) which will decrease the current ratio. So it is the right option. The rest of the options either increase both current assets and current liabilities or decrease both current assets and current liabilities.