Table 15.2 The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
-The firm would like to increase its current ratio. This goal would be accomplished most profitably by ________. (See Table 15.2)
A) increasing current liabilities
B) decreasing current liabilities
C) increasing current assets
D) decreasing current assets

Question

Table 15.2  The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
-The firm would like to increase its current ratio. This goal would be accomplished most profitably by ________. (See Table 15.2)
A) increasing current liabilities 
B) decreasing current liabilities 
C) increasing current assets 
D) decreasing current assets

Quizplus · Accepted Answer

Increasing current assets would increase the denominator in the current ratio, which would effectively increase the ratio. The company earns 5 percent on its current assets, which means that increasing them would also result in an increase in profitability. Decreasing current assets or increasing current liabilities would decrease the current ratio and could lead to decreased profitability.

Table 152 the Company Earns 5 Percent on Current Assets