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Sir i have got one question from kaplan exam kit
If gross profit margin improves current ratio also improves. State true or false
I thought it to be true as if selling price increases then gross profit improves…with greater selling price there will be greater cash inflow or trade receivables and hence improving current ratio
But answer is false
Kindly guide me throughTwo things.
Firstly, for the gross profit margin to increase then either the selling price has increased or the costs have reduced (or both). If these were the only factors affecting the current ratio, then it would improve.
However, secondly, the current ratio is also affected by the length of time they give receivables to pay the credit they take from suppliers, and the levels of inventory that they choose to hold. Changes in these might make the current ratio better or worse.
But sir….since it only states the effect of gross profit margin on current ratio shouldn’t we assume other things to remain constant
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