What effect would the following actions have on a firm’s current ratio?
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1 of 7
inventory is purchased on credit?
the current ratio would fall, assuming it was initially greater than 1.0. Inventory would increase and so would trade payables.
2 of 7
Inventory is purchased with payment on delivery
- If inventory is purchased using cash, then there is no change in the current ratio because current assets remain the same.
3 of 7
A short-term bank loan is repaid
of reducing current liabilities (which include short-term debt) and also reducing cash. This would result in an increase in the current ratio if it was initially greater than 1.0.
4 of 7
inventory is sold for a profit
inventory decreases by the cost value (inventories are accounted for at cost) but cash increases by the full selling price, which is higher. Therefore current assets and also the current ratio increase.
5 of 7
use dummy numbers to work stuff like this out
check tutorial week 2 notes for more info
6 of 7
. A short-term creditor would normally be most interested in
Solvency ratio - says how stable a company is in the short term
7 of 7
Other cards in this set
Card 2
Front
inventory is purchased on credit?
Back
the current ratio would fall, assuming it was initially greater than 1.0. Inventory would increase and so would trade payables.
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