ExpertHard1 markMultiple Choice
CPA · Question 13 · Area 2: Financial Statement Analysis
Company A has a Current Ratio of 2.0 and a Quick Ratio of 1.0. It uses $50,000 of cash to pay off $50,000 of Accounts Payable. How do the ratios change immediately after this transaction?
Company A has a Current Ratio of 2.0 and a Quick Ratio of 1.0. It uses $50,000 of cash to pay off $50,000 of Accounts Payable. How do the ratios change immediately after this transaction?
Answer options:
A.
Current Ratio increases; Quick Ratio decreases.
B.
Current Ratio increases; Quick Ratio remains unchanged.
C.
Both ratios increase.
D.
Current Ratio decreases; Quick Ratio increases.
How to approach this question
Plug in hypothetical numbers. If Ratio > 1, reducing both sides increases the ratio. If Ratio < 1, reducing both sides decreases it. If Ratio = 1, it stays the same.
Full Answer
B.Current Ratio increases; Quick Ratio remains unchanged.✓ Correct
A
Current Ratio (starts > 1): Reducing numerator and denominator by same amount increases the ratio. Quick Ratio (starts = 1): Reducing numerator and denominator by same amount leaves ratio at 1.
Common mistakes
Assuming paying debt always improves all liquidity ratios.
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