 |
|
| Browse | Ask | Answer | Search | Join/Login |
|
|
||||
|
When you want to know how something will affect a ratio, plug in some numbers and find out. The problem with the payment of an account payable is that it can increase or decrease the current ratio. It depends on whether the original ratio is under or over 1.0. If you keep in mind that current ratio is all current assets divided by all current liabilities, any reduction or increase of both an asset and a liability by the same amount will do the same thing - it can increase or decrease the ratio, so you can't say definitively that it'll increase it. As for collecting on a receivable. All that will do is exchange one asset for another and you end up the same place. Mathematically, in order to increase the answer, you either have to increase the numerator only or decrease the denominator only. (Or increase the numerator by a bigger amount than the denominator, etc.) What type of transaction can do that? I can think of a couple of good quick ones right off the top of my head. Remember that you have five classifications of accounts. Just because they don't affect the equation doesn't mean you can't use the other 3. |
||||
|
||||
|
The purchase of inventory on account is still increasing both a current asset and a current liability by the same amount. The purchase of temporary of investments for cash is still exchanging one current asset for another. In that aspect, they are no different than your original examples. You seem to want to use the current assets and current liabilities as both parts of the transaction. Just because that is what's in the equation does not mean a transaction involving other types of accounts cannot be involved. As long as one of the accounts fits in the equation, the equation will still change. Can you think of one involving a current asset increase combined with an account that is not a current asset or current liability? |
||||
| Question Tools | Search this Question |
Add your answer here.
Check out some similar questions!
Hi, I have a problem which is as follows; Contracts with lenders, such as bonds typically place restrictions on the financial statement ratios. Two commonly used ratios are the current ratio and the debt-to-equity ratio. Why is it that these appear as restrictions, that is, do they protect the...
Grant Film Productions wishes eo expand and has borrowed $100,000. As a condition for making this loan, the bank requires that the store maintained a current ration of at least 1.50. Business has been good bu t not great. Expansion costs have brought the current ratio down to 1.40 at December...
Why current ratio is increasing while the acid ratio is decreasing
How do I know what each makes contains. current assets 25,000 liabilities 40,000 equity 55,000 non current assets=80,000 ( Is this correct) non current 60,000
View more questions Search
|
