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Nikki4
Mar 15, 2007, 06:07 AM
For a firm that presently has a current ratio of 2.0, the effect on this ratio paying a current liability is

A. Raises the current ratio
B. Lowers the current ratio
C. Doesn't affect the current ratio
D. Depends on the amount paid
CaptainForest
Mar 15, 2007, 04:27 PM
I think the answer your textbook wants is: C. Doesn't affect the current ratio

However, I would disagree with it. The answer is in fact, “not enough information provided”.

Current Liabilities will go down, but will Current Assets also go down? If you pay with cash, they CA will go down, and therefore no change.

What if you pay with a fixed asset? For example you give them your car to settle a current liability debt?