CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

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?
Correct Answer: False

Since current assets are greater than current liabilities prior to this transaction, adding the same amount to both the numerator and denominator will reduce the current ratio.

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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