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Basic Question 4 of 6
A company with a 2.0 current ratio will experience a decline in the current ratio when a short-term liability is paid. True or False?
User Contributed Comments 4
| User | Comment |
|---|---|
| viannie | if current ratio>1.0, then a payment for short term liability will increase the current ratio if current ratio<1.0, then payment for short term liability will decrease the current ratio try out an example and you will get it. |
| Beret | Why do current assets decrease by a smaller percentage than current liabilities. Isnt it 1:1? |
| copus | Do the maths - its is real simple- Assume that Current assets = 100 and current liabilities = 50. The current ratio is 2. The company then uses 2 of cash to pay 2 of liabilities. The current ratio is now 98/48 = 2.04. In other words the CR has increased. |
| cleopatraliao | thanks copus:D |
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Learning Outcome Statements
calculate and interpret activity, liquidity, solvency, and profitability ratios
describe relationships among ratios and evaluate a company using ratio analysis
CFA® 2025 Level I Curriculum, Volume 3, Module 11.