Question
Which of the following transactions will improve the
Current Ratio of a company, assuming it is initially greater than 1:1?Solution
The Current Ratio = Current Assets / Current Liabilities. Selling a non-current asset for cash increases Current Assets (Cash) without affecting Current Liabilities, thus improving the ratio. (a) Increases both CA (Inventory) and CL (Creditors) equally, ratio decreases if >1. (b) Decreases both CA (Cash) and CL (Creditors) equally, ratio decreases if >1. (d) & (e) have no impact on current assets or liabilities.
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