A company has a current ratio of 2.0. It uses cash to pay off a current account payable. What is the immediate effect on the current ratio?

Answer options:

Increase

Decrease

No Change

Cannot be determined

How to approach this question

Plug in numbers. Assets = 200, Liabs = 100. Ratio = 2. Pay 50. Assets = 150, Liabs = 50. Ratio = 3. It increased.

Full Answer

A.Increase✓ Correct

When the Current Ratio is greater than 1.0, equal decreases in Current Assets and Current Liabilities (paying off debt) will increase the ratio mathematically.

Common mistakes

Assuming equal reduction maintains the ratio.

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