CFA Practice Question

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CFA Practice Question

If a company has a current ratio of 2.0, the effect of repaying $150,000 in short-term borrowing will most likely decrease ______.
A. the cash flow from operations but not the current ratio
B. the current ratio but not the cash flow from operations
C. neither the current ratio nor the cash flow from operations
Explanation: The repayment of short-term debt would reduce cash flow from financing, not cash flow from operations.

Any time the current ratio is above 1, equal changes in a current asset and a current liability will result in an increase in the current ratio; if current assets are 550 and current liabilities are 275, current ratio = 550/275 = 2.0. After the bank borrowing has been paid, the ratio becomes (550-150)/(275-150) = 3.2. Had the ratio initially been below 1, current assets 250 and current liabilities 275, current ratio = 250/275 = 0.91, the equal change in current assets and liabilities would decrease the current ratio: 100/125=0.80.

User Contributed Comments 2

User Comment
Inaganti6 principal payments are in CFF ?
Sagarsan88 if the ST debt is repaid...souldnt te firm benefit of lower interest paid? thus lower cash outflow from operations?
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