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Why would the purchase of inventory on credit would not increase the current ratio and instead decrease it whilst if current assets are 4 and current liabilities are 5 then if inventory of 1 is added to both the current ratio increases
Hi,
If we purchase the inventory on credit then inventory would increase and payables increase too by the same amount. If we use the 1 in the formula then we have the following:
Before the current ratio is 4/5 = 0.8
After the current ratio is 5/6 = 0.8333
Giving an increase in the current ratio.
Thanks
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