Question

The company recorded cash disbursements by paying trade accounts payable but held the checks past the year-end date, meaning that the “disbursements” should not have been shown as credits to cash and debits to accounts payable. Is the current ratio higher than, equal to, or lower than what it should have been?

Answer 1

Since the company has shown cash disbursements , the intended balance of cash on the books is lower than what it should be. Similarly the intended balance of Accounts payable is lower than what it should be as accounts payable is also debited for the transaction.

The current assets (which include cash) is thus reflecting a lower balance while the current liabilities (Accounts payable) are also now reflecting a lower balance.

If the ratio of current assets to current liabilities before this transaction was 1 : 1, then the ratio would be unaffected since an equal about is reduced from both the numerator (current assets) and denominator (current liabilities).

If the ratio of current assets to current liabilities before this transaction was 2 : 1, the current ratio would be higher than what the actual current ratio would be.

If the ratio of current assts to current liabilities before this transaction was 0.5 : 1, the current ratio would be lower than what the actual current ratio would be numerator (current assets) reduces with an equivalent decrease in the denominator (current liabilities).

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