- This topic has 1 reply, 2 voices, and was last updated 3 years ago by
.
- Posts
If cash in the bank is used to pay some of the payable, what will be the effect on
the current and quick ratios?
Current ratio Quick ratio
A Increase Increase
B Increase Decrease
C Decrease Increase
D Decrease DecreaseIn kaplan kit the answer is B.
I did not understand , when cash in bank is used to pay payables, the current asset and liability will decrease.
Can you please explain how the answer came up with?
Assuming that you have copied the question correctly, then the correct answer is A (not B).
Although the current assets and current liabilities will both fall by the same amount, the ratios will increase.
(Suppose the assets are 100 and the liabilities are 50. The current ratio is 2.0.
Suppose 20 cash is used to pay liabilities, so the assets are now 80 and the liabilities are 30. The current ratio is now 2.67.)
- You must be logged in to reply to this topic.