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If ABC Company Limited has a current ratio of 1

Finance

If ABC Company Limited has a current ratio of 1.2:1, which of the following activity would increase the company’s current ratio:

A.

Borrowing money on a 6-month note

B.

Paying long term debt for cash

C.

Declaring a cash dividend payable next period

D.

Cash repayment to reduce account payment

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Let Current Liabilities = $10,000

Current Liabilities = $10,000 * 1.2 = $12,000

a) Borrowing money increases cash and notes payable, let say 1000

Revised Current ratio = [12,000 + 1,000] / [10,000 + 1000]

Revised Current ratio = 1.18

Current ratio decreased,

b) Long term debt doesn't form part of Current liabilities, let say long term debt repaid = 1000. It impact current Assets

Current ratio = [12000 - 1000] / [10,000] = 1.10

Current ratio decreased,

c) Declaring a cash dividend payable increases current liability nut not current assets,

Let say dividend payable = 1,000

Current ratio = [12,000 / 11,000] = 1.09

Current ratio decreased,

d) Cash repayment to reduce Accounts payable, decreases both current asset and current liability,

Let say cash repaid = 1000

Current ratio = [11000 / 9000] = 1.22

Current ratio increased