Question

In: Finance

WHich of the following changes would result in the current ratio increasing by approximately 20%? A....

WHich of the following changes would result in the current ratio increasing by approximately 20%?

A. current assets 10%, current liabilities 10%

B. current assets 20%, current liabilities -10%

C. current assets -5%, current liabilities -15%

D. current assets 0%, current liabilities -20%

Expert Solution

We know that, Current ratio = Current assets/current liabilities

A). So, When current assets increased by 10%, current liabilities increased by 10%

New current ratio = current assets*1.1/current liabilities*1.1 = current assets/current liabilities.

=> New current ratio is same as old current ratio.

B). When current assets increased by 20%, current liabilities decreased by 10%

New current ratio = current assets*1.2/current liabilities*0.9 = current assets*1.333/current liabilities.

=> New current ratio is increased by 33.33%

C). So, When current assets decreased by 5%, current liabilities decreased by 15%

New current ratio = current assets*0.95/current liabilities*0.85 = current assets*1.1176/current liabilities.

=> New current ratio is increased by 11.76%.

D). So, When current assets increased by 0%, current liabilities decreased by 20%

New current ratio = current assets/current liabilities*0.8 = current assets1.25/current liabilities.

=> New current ratio is increased by 25%.

So, best correct option is option D.

jeff jeffy answered 1 year ago

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