Lincoln Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?

Question

Quizplus · Accepted Answer

The key here is to recognize that if the CR is less than 1.0, then a given increase in both current assets and current liabilities would lead to an increase in the CR. The reverse would hold if the initial CR were greater than 1.0. Here the initial CR is less than 1.0, so borrowing on a short-term basis to build inventories would increase the CR. For example:
 $\begin{array}{llllll}
\text { Original } && \text { New } & \text { Old } & \text { New } \
\frac{\mathrm{CA} / \mathrm{CL}}{1 / 2} & \frac{\text { Plus \$1 } }{1 / 1} & \frac{\mathrm{CA} / \mathrm{CL}}{2 / 3} & \frac{\mathrm{CR}}{0.50} &\frac{\mathrm{CR}}{0.67} \quad \text { CR rises if initial CR is greater than } 1.0
\end{array}$ 
All of the other statements are incorrect, although c, d, and e would be correct if the initial CR had been >1.0.

Lincoln Industries' Current Ratio Is 0