Question : What will be the effect on the current ratio when cash payments are made to its creditors?
Option 1: It will decrease
Option 2: It will increase
Option 3: No change
Option 4: None of these
Answer (1)
23rd Jan, 2024
Correct Answer: It will increase
Solution :
After cash payment to some of its creditors, the current ratio will increase.
Since ideal current ratio is 2:1 and further the current liability is reduced as well as the current asset with the same amount, it will proportionately reduce the liability more than the assets and will result into an increase in the current ratio.
Hence option 2 is the correct answer.
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