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Mr MikeLittle
can you explain me why the answer is C not BFifer Co has a current ratio of 1.2:1 which is below the industry average. Fifer Co wants to increase its
current ratio by the year end.
Which of the following actions, taken before the year-end, would lead to an increase in the current ratio?
A Return some inventory which had been purchased for cash and obtains a full refund on the cost
B Make a bulk purchase of inventory for cash to obtain a large discount
C Make an early payment to suppliers, even though the amount is not due
D Offer early payment discounts in order to collect receivables more quicklyIn b if we purchase a large amount of inventory we will pay less cash but get high inventory and this will increase our Working capital and therefore current ratio will be higher. I think B C both of are correct
“In b if we purchase a large amount of inventory we will pay less cash but get high inventory ”
So, if you spend $100 buying inventory, and you gain $100 worth of inventory (valued at the lower of cost and net realisable value) …
… how does that change the value of your current assets?
OK?
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