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Current ratio this year is 1,33:1 compared to that of 1,25:1 last year/ which of the following would be possible explanation.?
1) Company made an unusually large sale immediately prior to the year
2)company paid its payable earlier than usual out of a bank overdraft
3)company made an unusually large purchase of goods for cash immediately prior to the year end and these goods remain in inventory
4)company paid its payable earlier than usual out of a positive cash balanceanswer is 1 and 4. but I understood this
I choose 2 and 3
I don’t agree with that current ratio=current assets/current liabilities
if company pay cash, t a result current will be understate and current ratios also understate. and also didn’t understand that why the answer is 3 incorrect. if goods remain in inventory it will increase current ratio,actually when we purchase goods cash decrease but inventory increase,there is no effect. surely it decreases quick ratio. but in this example we are asked current ratio. variant 1 is clear .1 is true, because receivables (or cash) will have increased. Inventory will be reduced, but since the sale will be for more than cost, current assets will have increased and so current ratio will have increased.
2 is not correct because payables will reduce but bank overdraft will increase by the same amount- so current liabilities will not change, and therefore current ratio will not change,
3 is not correct because cash will fall but inventory will increase by the same amount, so current assets will not change and therefore current ratio will not change,
4 is correct because payables will fall (so current liabilities will fall) – also cash will fall (so current assets will fall). If current assets and current liabilities both fall by the same amount, then the current ratio will increase (make up some numbers and try it 🙂 )
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