Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

a. Cash purchase of inventory

b. Cash payment of an account receivable

c. Cash payment of an account payable

d. Credit sale of inventory at cost

e. Cash sale of inventory at a loss

Question

Business

Petersen

18 October, 03:42

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

a. Cash purchase of inventory

b. Cash payment of an account receivable

c. Cash payment of an account payable

d. Credit sale of inventory at cost

e. Cash sale of inventory at a loss

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Answers (1)

Know the Answer?

Rudy Dyer · Answer 1

c. Cash payment of an account payable

Explanation:

The current ratio is equal to current assets, divided by current liabilities, and measures a company's ability to meet its short term obligations.

The only transaction listed in the question that would increase the current ratio is a cash payment of an account payable, because it is direct reduction in the short-term obligations of the firm, since an account payable has been paid off.