Question

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

a. Cash purchase of inventory
b. Cash payment of an account receivable
c. Cash payment of an account payable
d. Cash sale of inventory at a loss

Answer 1

Cash payment of an account payable will increase the current ratio.

Step-by-step explanation:

The correct answer is c. Cash payment of an account payable.

The current ratio is a measure of a company's liquidity and is calculated by dividing its current assets by its current liabilities. An increase in the current ratio indicates that the company has more current assets relative to its current liabilities.

When a company makes a cash payment of an account payable, it reduces its current liabilities. This results in an increase in the current ratio because the denominator of the ratio decreases, while the numerator (current assets) remains the same.