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    Shahriar Anam's Avatar
    Shahriar Anam Posts: 1, Reputation: 1
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    #1

    Jun 20, 2012, 02:24 AM
    If current asset and current liability is reduced by same amount then what is the eff
    If current asset and current liability is reduced by same amount then what is the effect of this in current ratio?
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Jun 20, 2012, 03:48 AM
    It depends on whether the current ratio is > 1 or < 1 to begin with, before the equivalent reduction in both current assets and current liabilities.

    Let A, L, and x denote, respectively, current assets, current liabilities, and some positive amount by which both CA and CL will be reduced. Also assume that the pre-change current ratio is > 1, which is equivalent to saying that current assets exceed current liabilities (the more typical case, although it can certainly go the other way, too). Now note the sequence of inequalities...



    Starting with an assumption that the current ratio is greater than 1, what conclusion is them implied regarding the relationship between the pre- and post-change ratios?

    And had we started with a current ratio less than 1 (A < L), what would that have said about the comparison of the pre- and post-change ratios?

    Note: You could've answered this one by just experimenting with specific current asset and current liability amounts, but all that would've told you for sure is the result for that particular choice of numbers.
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