The current ratio of a firm would be decreased 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 long-term credit basis.

Question

Quizplus · Accepted Answer

Selling inventories on a long-term credit basis would decrease the current ratio of a firm because it would increase the accounts receivable (current asset) without increasing the current liabilities. This would result in a lower current ratio, which is calculated as current assets divided by current liabilities. Choices A, B, and C would not necessarily decrease the current ratio since they involve the conversion of non-current assets or financing activities that may affect both current assets and current liabilities in a way that could maintain or increase the current ratio (e.g., if the cash proceeds are used to pay off current liabilities or purchase current assets).

The Current Ratio of a Firm Would Be Decreased by Which