Assuming current assets exceed current liabilities, determine the impact of reducing accounts payable using cash. A....

Assuming current assets exceed current liabilities, determine the impact of reducing accounts payable using cash.

A. Increase the current ratio.

B. Decrease working capital.

C. Decrease the current ratio.

Expert Solution

Here, Current Assets exceeds Current Liabilities it means that Current Asset proportion is more than Current Liabilities. Reduction in Account Payable by Cash, As with such transaction Denominator get reduced and Numerator also get reduced.

So, with the decrease in denominator the Current ration will automatically increase.

Hence Current Option is A: Increase the current Ratio.

Same can be easily understood by Below example:

Suppose Current Asset is 40000 $

Current Liability = 20000$ i.e Current Ratio = Current Assets / Current Liabilities.

Hence, befor epayment transaction Current Ratio is : 40000 / 20000 = 2: 1

However, if Account Paybale in Current Liability is composed of 10000 $ and same is paid off by cash , hence it will reduce the denominator as well as numerator. Impact will be Current Asset changes to 30000 $ whereas Current Liabilities chnages to 10000 $ henc New Current ratio = 30000 / 10000 = 3: 1.

Hence it can be concluded that the Current Ratio will increase withthe decrease in Current Liabilities.

ekkarill92 answered 2 years ago

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Question

Assuming current assets exceed current liabilities, determine the impact of reducing accounts payable using cash. A....

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