A business with current assets $144,000 and current liabilities $50,000 pays $20,000 of suppliers two days before the year end. What happens to the current ratio?

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Question

A business with current assets $144,000 and current liabilities $50,000 pays $20,000 of suppliers two days before the year end. What happens to the current ratio?

Accepted Answer

It rises from 2.88 : 1 to 4.13 : 1 — 88 : 1 to 4.13 : 1. Award 1 mark. Working: current assets become $124,000 and current liabilities $30,000, and $124,000 ÷ $30,000 = 4.13. Paying a debt reduces both sides by the same amount, which raises a ratio already above one — while the business now holds $20,000 less cash.

Answer

It falls from 2.88 : 1 to 2.48 : 1

Answer

It rises from 2.88 : 1 to 3.44 : 1

Answer

It stays at 2.88 : 1, because both sides fall equally

Answer

It rises from 2.88 : 1 to 4.13 : 1

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