CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

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?
Correct Answer: False

The current ratio is equal to current assets divided by current liabilities. A company with a 2.0 current ratio will experience an increase in the current ratio when a short-term liability is paid. This is because current assets will decrease by a smaller percentage than current liabilities, causing the ratio to increase.

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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