Amram Company's current ratio is 2.0.Considered alone,which of the following actions would lower the current ratio?
A) Borrow using short-term notes payable and use the proceeds to reduce accruals.
B) Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
C) Use cash to reduce accruals.
D) Use cash to reduce short-term notes payable.
E) Use cash to reduce accounts payable.

Question

Quizplus · Accepted Answer

?A quick scan of the alternatives would indicate that b is obviously correct-it would lower the CR.Since there is only one correct answer,b must be the right answer.The following equation can also be used.If you add equal amounts to the numerator and denominator,then if Orig CR = or > 1.0,CR will decline,but if Orig CR < 1.0,CR will increase.Obviously,if you add to one but not the other,CR will increase or decrease in a predictable manner.This is the situation with choice b.CR = (Orig CA +/- ?)/(Orig CL +/- ?).a is false;it would leave the QR unchanged.b would obviously reduce the CR-CA remain constant and CL would increase.c is false,given that the initial CR > 1.0.d is false,given that the initial CR > 1.0.e is false,given that the initial CR > 1.0.

Amram Company's Current Ratio Is 2