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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..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.
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