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    mla's Avatar
    mla Posts: 3, Reputation: 1
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    #1

    May 28, 2006, 04:26 PM
    Affects on current ratio
    How would the following actions affect a firm's current ratio?

    1. inventory is sold
    2. the firm takes out a bank loan to pay its suppliers
    3. a customer pays its overdue bill
    4. the firm uses cash to purchase additional inventories.
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #2

    May 28, 2006, 07:52 PM
    Current Ratio = Current Assets / Current Liabilities

    a) inv sold would mean CA would go down, but cash or AR would go up. Therefore, there is no net change.

    b) taking out a bank loan. CA goes up, Cash, and CL - assuming this is a short term loan, there would be no change. However, if this loan is more than 1 year or 1 operating cycle, than CL would not go up. Therefore, CA increased, CL no change so Current Raito increases.

    c) customer paying would be increase in CA in Cash, but an equal decrease in AR, so no net change to Current Ratio

    d) cash goes down, but inv goes up, so no net change.
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