Question

A company's current ratio is presently 2:1. Which of the following transactions would decrease that ratio? A. Depreciation of plant and equipment B. Purchase of inventory on credit C. Payment of accounts payable D. Receive payments from accounts receivable CAL (ht

Answer 1

​​​​​Current Ratio=Current Assets/Current Liabilities

A company's current ratio es rol which of the following transaction would decrease that ratio ? A. Depreciation of plant and equipment B. Purchase of Enventory on credit c. Payment of accounts payable D. Receive payments from step: ster. Now, for this question lets analyse the effect of the above transaction on ewoont Assets and ewerent Leabilities. For better understanding, Let the current Liabilities be $100'. As per the equation current Assets = $100x2 $200

= 2:1

So, Current Assets=2× Current Liabilities

step: 2. Effect of the Transactions : Depreciation on Plant Transaction A² and equipment Depreciation is an operating expenses which reduces the balance of plant and excipment (plant ond ecruipment are fixed assets) and operating income of the company. There will be no empact of this dreams antion on Current Assets and current Leabiliting'. Transaction Bo Purchase of Enventory on credit Inventory is a current asset. Purchase of enventory Encreases both the balance of Enventory and accounts payable (which is a current liability). Leto see the impact on current reatio by an Emaginary amount. hat, the camount of Enventory purchase on credit be $50 ewocent Assets Now, ewocent ratio a. ecurrent Liabilities $200 + $50 & 100 & $50 $250 $150 2 167:1 That means this current ratio. transaction decreases the

Transaction & Payment of accounts payable Accounts payable es a current liability. Payment of accounts payable decreases both corrent liabilities: (accounts payable) and current assets (cash or bank). het, the amount of accounts payable be $50 Mow, eworent ratio = $200 - $50 $100 - $50 a $150 $50 That means this transaction increases the eworent ratio. – 3:1 Transcetion de Reccese payments from accounts receivable Accounts receivable es a current asset. Payments from accounts receivable decreases the balance or accounts receivable and increases the amount of cash or bank balance (which are current assets) That means total eworent assets romains unchanged 30 cevocent ratio also remains unchanged. from the above analysis we can see Only transaction B' decreases the current ratio,