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Hello Sir!
Please help me out in thisPind Co has a current ratio of 1.5 and a quick ratio of 0.9.
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 DecreaseThe correct answer is B,
if the cash is used to pay the dues, the cash balances will decrease and the payable balances will also decrease. I got a bit confused here.
why not option D please help me out?Thanks in advance
The way I find easiest for this kind of question is to make up some numbers and then see what happens.
Suppose the payables are 100 (but choose any number you want – the final outcome will be the same). In that case total current assets would be 150, current assets excluding inventory must be 90, and therefore inventory must be 60.
Suppose now that cash of 10 is used to pay some of the payables.
Total current assets will be 140; current assets excluding inventory will 80, and payables will be 90.
So the new current ratio will be 140/90 = 1.56 (so an increase), and the new quick ratio will be 80/90 = 0.89 (so a decrease).
Again, start with any number you want for payables, and you will still end up with the current ratio increasing and the quick ratio decreasing.
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Great thank you sir!
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