When a company with a current ratio of 1.2 pays a current liability:
A)Its current ratio decreases.
B)Its current ratio increases.
C)Its current ratio remains unchanged.
D)Its debt to equity ratio increases.

Question

Quizplus · Accepted Answer

When a company pays a current liability, its current liabilities decrease, and if the payment is made using current assets, the current assets also decrease. However, since the current ratio is current assets divided by current liabilities, and the liabilities decrease by the same amount as the assets, the ratio increases if the initial ratio is above 1.

When a Company with a Current Ratio of 1