Amram Company's current ratio is 2.0. Considered alone, which of the following actions would LOWER the current ratio?

a) Borrow using short-term notes payable and use the proceeds to reduce accruals.

b) Borrow using short-terms note payable and use the proceeds to reduce long-term debt.

c) Use Cash to reduce accruals.

d) Use cash to reduce short-term notes payable.

e) Use cash to reduce accounts payable.

Question

Business

Messiah Sparks

16 April, 17:16

Amram Company's current ratio is 2.0. Considered alone, which of the following actions would LOWER the current ratio?

a) Borrow using short-term notes payable and use the proceeds to reduce accruals.

b) Borrow using short-terms note payable and use the proceeds to reduce long-term debt.

c) Use Cash to reduce accruals.

d) Use cash to reduce short-term notes payable.

e) Use cash to reduce accounts payable.

+2

Answers (1)

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Jada Campos · Answer 1

b) Borrow using short-terms note payable and use the proceeds to reduce long-term debt.

Explanation:

Current ratio is a liquidity ratio that measures the ability of a business to service it's short-term obligations. It tells how the business can use current assets to settle it's debt.

The formula for calculating current ratio is Current Assets / Current liabilities

So of a company borrows using short term notes payable, assets will not change while current liabilities increases. The denominator will increase resulting in reduction of the ratio less than 2.