Question

Other things held constant, which of the following will affect the current ratio, assuming an initial current ratio greater than 1.0?

	Fixed assets are sold for cash.
	Long-term debt is issued to pay off current liabilities.
	Accounts receivable increases.
	Cash is used to pay off accounts payable.
	A bank loan is obtained, and the proceeds are credited to the firm's checking account.
	all of the above
	none of the above

Answer 1

Fixed Assets are sold for cash

Long-Term debt is issued to pay off current liabilities

Accounts receivable increases

A Bank loan is obtained, and the proceeds are credited to the firm's checking account

Lets see all the options

Fixed Assets are sold for cash

Fixed Assets are in not part of current assets but when sold then cash increases so the current assets increases while current liabilities stays same so the current ratio increases.

Long-Term debt is issued to pay off current liabilities

This will increase the long term liabilities but reduce the current liabilities thus it will increase current ratio

Accounts receivable increases

If the account receivables increases then the current assets will increase thus the current ratio. This is keeping in mind that nothing else in current liabilities or current assets is reduced to increase the account receivable.

Cash is used to pay off accounts payable

Cash is a current assets and accounts payable is a current liability thus the current ratio will be unchanged.

A Bank loan is obtained, and the proceeds are credited to the firm's checking account

If the Bank loan is paid in installments then the short term liabilities will increase by the portion of loan which is to be paid in short term and cash will increase by total amount of loan thus the current ratio will change.