Question

Under what conditions could a company artificially increase their current ratio at the end of their accounting reporting period by taking out a short term loan and placing the proceeds in the cash account? a. When the current ratio is equal to one before this transaction. b. When the current ratio is less than one before this transaction. c. When the current ratio is greater than one before this transaction. d. The company's current ratio would not increase after this transaction.

Answer 1

The answer for the condition under which a company could artificially increase their current ratio at the end of their accounting reporting period by taking out a short term loan and placing the proceeds in the cash account is option A) When the current ratio is equal to one before this transaction.

Step-by-step explanation:

When a company seeks to increase their current ratio at the end of their account reporting, It shows that the company is less liquid and the business is closer to having no working capital.

In terms of current ratio for the condition of less liquidity, the current ratio is either approaching one and when it finally gets to 1:1, a company will be forced to take a short term loan as shown in the question to aid with operating expenses while taking the necessary steps to reduce liability and increase assets.

Answer 2

d. The company's current ratio would not increase after this transaction.

Step-by-step explanation:

Taking out a short-term loan includes taking out cash via short-term loan. Present liabilities are known as short term loan.

Revenues from Short term loan positions in cash account meaning that current assets will grow as cash is listed as current assets.

This implies the existing liabilities are now raised in the same proportion as the current assets.

Current Ratio formula is as follows, Current Ratio = Current Assets / Current Liabilities.

If the current assets and current liabilities are both increased in the same proportion then this ratio has no impact.

Which means the ratio won't change after this transaction.