CFA Practice Question
A company has a current ratio of 0.5. Cash is used to pay off accounts payable. What happens to the ratio?
A. Decreases.
B. Increases.
C. Stays the same.
Explanation: For example, cash = 1000, inventory = 2000, accounts payable = 2000. If cash is used to pay off the accounts payable the ratio decreases.
User Contributed Comments 7
| User | Comment |
|---|---|
| iambroke | when its greater than 1 it increases....just plug in numbers |
| jdelli222 | There is no way this can be correct. The current ratio is initially 1.5 (3000/2000 = 1.5). If you use cash to pay down accts. payable, you then have (2000/1000 = 2). 2 is greater than 1.5. The ratio should increase. |
| hogann | If the current ratio is less than 1 it decreases. If the current ratio is greater than 1 it increaes (see jdelli's ex.) However in the case of the question it is .5 so decrease |
| spinzon | Someone else please explain a bit more? |
| GBolt93 | AN explanation is garbage it makes the current ratio seem like its 3/2=1.5 Better one: Cash=.25 Total CA=.5 CL=1 current ratio=.5/1=0.5 spend all cash to decrease AP: Cash=0 Total CA=0.25, CL=0.75, Current Ratio=.25/.75=0.33 |
| Cain621 | thank you gbolt |
| pigletin | dis a elementary level math concept current asset = 0.5 means current asset is less than current liability, then you deduct same amount from each of them, the new ratio become smaller. |