The following financial data have been taken from the records of CPZ Enterprises.

-What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts payable? $\begin{array}{l}

\begin{array}{lll}
&\text { Current Ratio }& \text { Acid-Test Ratio }\
\text { A) } & \text { Increase } & \text { Increase } \
\text { B) } & \text { Decrease } & \text { Decrease } \
\text { C) } & \text { Increase } & \text { Decrease } \
\text { D) } & \text { Decrease } & \text { Increase }
\end{array}
\end{array}$

Question

The following financial data have been taken from the records of CPZ Enterprises.

-What will happen to the ratios below if CPZ Enterprises uses cash to pay 50% of its accounts payable? $\begin{array}{l}

\begin{array}{lll}
&\text { Current Ratio }& \text { Acid-Test Ratio }\
\text { A) } & \text { Increase } & \text { Increase } \
\text { B) } & \text { Decrease } & \text { Decrease } \
\text { C) } & \text { Increase } & \text { Decrease } \
\text { D) } & \text { Decrease } & \text { Increase }
\end{array}
\end{array}$

Quizplus · Accepted Answer

Paying off accounts payable with cash reduces both current liabilities and current assets, but the reduction in liabilities improves the current ratio. The acid-test ratio also improves because it focuses on more liquid assets, and the reduction in liabilities outweighs the cash reduction.

The Following Financial Data Have Been Taken from the Records