Question

General Hospital has a current ratio of 0.5 which of the following actions would improve (increase) this ratio? (Hint creates a simple balance sheet that has a current ratio of 0.5 then judge how the financial transaction would affect the balance sheets.)

a• Use cash to pay off current liabilities
b• collect some of the current accounts receivable
c• use cash to pay off some long-term debt
d• purchase additional inventory on credit IE accounts payable
e• sell some of the existing inventory at cost (book value)

Answer 1

To improve the current ratio of General Hospital, the company can collect accounts receivable, pay off current liabilities with cash, or sell existing inventory at cost.

Step-by-step explanation:

The current ratio is a measure of a company's ability to pay off its short-term liabilities with its short-term assets. A current ratio of 0.5 indicates that General Hospital has more short-term liabilities than short-term assets. To improve (increase) this ratio, the company can take the following actions:

1. Collect some of the current accounts receivable: By collecting outstanding payments from customers, the company can increase its cash or cash equivalents, which will improve the current ratio.
2. Use cash to pay off current liabilities: By using available cash to pay off current liabilities, the company can decrease its short-term liabilities, which will improve the current ratio.
3. Sell some of the existing inventory at cost (book value): By selling some of the existing inventory at cost, the company can convert it into cash, which will increase the current ratio.