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Basic Question 1 of 12
Assume that Temple Company has a current ratio of 1.75. The purchase of inventory on account would have no effect on this ratio since current assets and current liabilities would both increase by the same amount. True or False?
User Contributed Comments 7
| User | Comment |
|---|---|
| Pooh | Current Assets increases at a faster rate than Current Liabilities. Ratio was already greater than 1. |
| tony1973 | no pooh. When the current ratio is bigger than 1, current asset increases at a slower rate than current liabilities if both are increased by the same amount. |
| haarlemmer | Put it simple assuming original 2/1=2 now add 1 on both which then is 3/2=1.5 |
| desertfox27 | if CR is less than 1, 2/3=0.67 and now add 1 on both which is then 3/4=0.75 |
| thud | Couldn't you say it's false because if you pay inventories with cash, you don't change total assets but you change current assets? |
| mchu | Thud,in the question, it says'' on account'', which means partial debt. |
| missmalik | current ratio is 0.9 ... then increasing CA and CL with same number / percentage will increase the current ratio from 0.9 to some higher number ... if current ratio is 0.9 ... then decreasing CA and CL with same number / percentage will decrease the current ratio from 0.9 to some lower number ... if current ratio is 1.2 ... then increasing CA and CL with same number / percentage will decrease the current ratio from 1.2 to some lower number ... if current ratio is 1.2 ... then decreasing CA and CL with same number / percentage will increase the current ratio from 1.2 to some higher number ... |
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Learning Outcome Statements
demonstrate the conversion of balance sheets to common-size balance sheets and interpret common-size balance sheets;
calculate and interpret liquidity and solvency ratios.
CFA® 2024 Level I Curriculum, Volume 3, Module 19.