Question 1

Orion Corp. is analyzing its liquidity. Current Assets are $500,000 (including $100,000 inventory and $20,000 prepaid expenses) and Current Liabilities are $250,000.

Orion pays $50,000 cash to retire a short-term note payable. What is the effect on the Current Ratio and the Quick Ratio?

Accepted Answer

Calculate the ratios before and after the transaction. Alternatively, know the rule: If Ratio > 1, decreasing both numerator and denominator by the same amount INCREASES the ratio.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Assuming paying a liability always improves liquidity ratios without checking the math (it depends if ratio is > or < 1).

Orion Corp. is analyzing its liquidity. Current Assets are $500,000 (including $100,000 inventory and $20,000 prepaid expenses) and Current Liabilities are $250,000. <br/><br/>Orion pays $50,000 cash to retire a short-term note payable. What is the effect on the Current Ratio and the Quick Ratio?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 5

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