The current ratio of a firm would be increased by which of the following?
A) land held for investment is sold for cash
B) equipment is purchased, financed by a long-term debt issue
C) inventories are sold for cash
D) inventories are sold on a credit basis

Question

Quizplus · Accepted Answer

Selling land for cash would increase the current assets of the firm, which increase the current ratio. The current ratio is a measure of a firm's ability to pay off its short-term obligations using its current assets. Therefore, increasing current assets, such as cash, would increase the current ratio.

Option B would not increase the current ratio because while it increases the current assets (via purchasing equipment), it also increases the current liabilities (via long-term debt issue), which would have a neutral effect on the current ratio.

Option C and D would not change the current ratio because selling inventory for cash or credit does not change the current assets or current liabilities of the firm, and thus, would not impact the current ratio.

The Current Ratio of a Firm Would Be Increased by Which