Kelly Company has a current ratio greater than 1 and an acid-test ratio less than 1....
Kelly Company has a current ratio greater than 1 and an acid-test ratio less than 1. how would cash payments to suppliers to reduce accounts payable affect these ratios?
| current ratio | quick ratio | |
| a. | decreased | decreased |
| b. | decreased | increased |
| c. | increased | decreased |
| d. | increased | increased |
Homework Answers
| Current Ratio=Current Assets (Includes Cash)/Current Liabilites | |||||
| Acid Test Ratio=Quick Assets (Includes Cash exculdes Stock and Prepaid Liabilties)/Current Liabilites | |||||
| Taking an Example: | |||||
| Current Ratio is Greater than 1: | |||||
| Assumed CA= 150000 , CL=100000 | |||||
| Current Ratio= 150000/100000 | |||||
| Current Ratio= 1.5 | |||||
| Suppose 50000 is Paid to settle Accounts Payable | |||||
| Assumed CA= (150000-50000) , CL=(100000-50000) | |||||
| Current Ratio= 100000/50000 | |||||
| Current Ratio= 2.0 | |||||
| Current Ratio will increase | |||||
| Quick Ratio is Less than 1: | |||||
| Assumed CA= 80000 , CL=100000 | |||||
| Current Ratio= 80000/100000 | |||||
| Quick Ratio= 0.8 | |||||
| Suppose 50000 is Paid to settle Accounts Payable | |||||
| Assumed CA= (80000-50000) , CL=(100000-50000) | |||||
| Current Ratio= 30000/50000 | |||||
| Qucik Ratio= 0.6 | |||||
| Quick Ratio will Decrease | |||||
| Answer is C | |||||
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Kelly Company has a current ratio greater than 1 and an
acid-test ratio less than 1....
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