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Dear John, hi,
First of all thank You so much for the lectures, I passed F2, F3 without any problems, using them for preparing.
My current question is connected with F5.
The question states as follows: if cash in the bank is used to pay some payables, how would current and quick ratios behave.
The book gives us the answer, that the current ratio would increase and the quick ratio decrease.
In my logic cash should be included in current assets while calculating both ratios, as payables included in current liabilities in both.
If we reduce current liabilities to cover payables by some cash amount, we should simultaniously reduce payables by the same amount, as they are covered, so the overall effect on the both ratios would be zero.
Would You be so kind to tell me where do I make a mistake in my logic?Thank You in advance.
Best regards,
MariaIf you are sure that you have copied the question correctly, then the Kaplan answer is wrong (I don’t have the Kaplan Kit, only BPP, and so I can’t check).
Suppose, you have the following:
Cash 400; Receivables 200; Inventory 100; Payables 300.Then the current ratio is 2.33 and the quick ratios is 2.00
Suppose they use 200 cash to pay payables.
The new figures are cash 200; receivables 200; inventory 100; payables 100The new current ratio is 5.00 and the new quick ratio is 4.00
They both increase 🙂
Dear John,
thank You a lot for the answer, it makes all the thing clear when figures are used!
The question is “If cash in the bank is used to pay some of the payables, what will be the effect on the current and quick ratios ” with answer – increase/decrease, definitely should be misprint in the Answers section.
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