ExpertMedium1 markMultiple Choice
CPA · Question 34 · Area I: Business Analysis
A company has a current ratio of 2.0. It uses cash to pay off a current account payable. What is the immediate effect on the current ratio?
A company has a current ratio of 2.0. It uses cash to pay off a current account payable. What is the immediate effect on the current ratio?
Answer options:
A.
Increase
B.
Decrease
C.
No Change
D.
Cannot be determined
How to approach this question
Plug in numbers. Assets = 200, Liabs = 100. Ratio = 2. Pay 50. Assets = 150, Liabs = 50. Ratio = 3. It increased.
Full Answer
A.Increase✓ Correct
When the Current Ratio is greater than 1.0, equal decreases in Current Assets and Current Liabilities (paying off debt) will increase the ratio mathematically.
Common mistakes
Assuming equal reduction maintains the ratio.
Practice the full CPA BAR Practice Exam 5
50 questions · hints · full answers · grading
More questions from this exam
Q01Orion Manufacturing is analyzing its working capital efficiency. For the current year, Orion repo...HardQ02Vanguard Corp. uses a standard costing system. For the month of June, the following data is avail...HardQ03Titan Industries is evaluating a new project with the following projected cash flows:<br/>- Initi...MediumQ04Under ASC 606, which of the following scenarios BEST describes a performance obligation that is s...MediumQ05Blue City's General Fund reported the following for the fiscal year:<br/>- Property taxes levied:...Hard