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Hi Sir, please could you explain why answer to this is C? It is from a paper on acca site, as i thought if early payment was made to suppliers yes payables would decrease but then so would the bank? hence have a nil affect on current ratio?
Fifer 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?
Return some inventory which had been purchased for cash and obtain a full refund on the cost
Make a bulk purchase of inventory for cash to obtain a large discount
Make an early payment to suppliers, even though the amount is not due
Offer early payment discounts in order to collect receivables more quickly
Hi,
It is an odd one but if the current ratio is 1.2:1 and we make an early payment to a supplier of say 0.1 then the current asset reduce from 1.2 to 1.1 and the current liabilities reduce from 1 to 0.9
The ratio is now stated at 1.1:0.9 which is the same as 1.22222:1 and therefore an increase in the current ratio.
Thanks
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