A company's current ratio is 1.5. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio and return on assets ratio?

Question

Quizplus · Accepted Answer

Using cash to retire notes payable due within one year would decrease the company's liabilities (notes payable) and increase its assets (cash). This would increase the current ratio (current assets / current liabilities) because the numerator (current assets) increases while the denominator (current liabilities) decreases. Additionally, since the transaction would not affect the company's net income, the return on assets ratio (net income / total assets) would remain the same, resulting in an increase in the overall return on assets.

A Company's Current Ratio Is 1