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Homework answers / question archive / If ABC Company Limited has a current ratio of 1
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
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