Ratio question — OpenTuition Forums

NNikita5y ago

Hello sir, Question: Pind Co has an operating profit margin of 15%. You are provided with an extract from its Statement of Financial Position: $ Equity and reserves Total equity and reserves 420,000 Non?current liabilities Loan 150,000 5% Preference shares 40,000 Current liabilities Payable 50,000 -> 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 Decrease My question : Shouldnt it be like no change because ultimately the Bank is reducing and payables are reducing with the same amount ? Help please..

John MoffatTutor5y ago#1

Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers (BPP and Kaplan) - they have answers and explanations. The ratios will change because they are ratios and not absolute amounts. I always find the best approach is to invent some quick figures and see what happens. Suppose current assets (including cash) were $80,000 and payables were $40,000. The both current and quick ratios (if we assume no inventory) would be 2. Suppose now they pay $10,000 to payables. So current assets reduce to $70,000 and payables reduce to $30,000. So the ratios change to 2.33. Try it again assuming there is inventory included in current assets of $10,000, and you will find there is the same effect.