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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Liquidity ratio

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- December 16, 2021 at 2:57 pm #644414
The answer to the question below is A. The suggested explanation says “numerator and denominator of the liquidity ratio would both reduce by the same amount. Therefore the ratio would decrease.”

But if numerator and denominator change by the same amount, won’t the ratio unchange?

Q.A company has a liquidity ratio equal to 0.5. The directors believe that the company has to reduce its bank overdraft and have agreed to alter the company’s credit terms to customers from two months to one month.

What would be the effects on the company’s cash operating cycle and liquidity ratio if this change were to be achieved?

Cash operating cycle. Liquidity ratio

A.decrease. Decrease

B.decrease. No change

C.decrease. increase

D.increase.December 16, 2021 at 4:12 pm #644425The ratio will not start the same.

Suppose the current assets are 100, and the current liabilities are 200. So the ratio is 0.5.

Reduce both of them by 40 and see what happens to the ratio 🙂

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