Question

In: Accounting

If a company decreases its accounts receivables what would be the effect on the following ratios...

If a company decreases its accounts receivables what would be the effect on the following ratios (all other being equal)?

Cash ratio

Acid-test ratio

Current ratio

Select one:

a. Increase             Decrease                 Decrease

b. None                  Decrease                 Decrease

c. Decrease            Decrease                 Decrease

d. None                  None                       Decrease

e. None                  Decrease                 None

Solutions

Expert Solution

Answer:

If a company decreases its accounts receivables what would be the effect on the following ratios (all other being equal)?

Cash ratio = No Impact,

Cash Ratio Formula = Cash & Equivalents/ Current Liabilities.

Acid-test ratio = Decreases,

Acid Test Ratio =Cash+Marketable Securities+A/R)/Current Liabilities​where:A/R=Accounts receivable​

Current ratio = Decreases,

​Current Assets = C + CE + I + AR + MS + PE + OLA

where:C = Cash

CE = Cash Equivalents

I = Inventory

AR = Accounts Receivable

MS = Marketable Securities

PE = Prepaid Expenses

OLA = Other Liquid Assets​

For Calculating Both Currant Ratio and Acid-Test Ratio we are consedering Account Receivables, so If a company decreases its accounts receivables the Both Currant and Acid- Test Ratio s will decrease.

So, Option B is the Right Answer.

Cash Ratio Acid-Test Ratio Currant Ratio

B. None Decrease                 Decrease

Please give a Positive Rating...

ekkarill92 answered 2 years ago
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