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    How actions affect a firm's current ratio

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    How would the following actions affect a firm's current ratio?

    A. Inventory is sold.
    B. The firm takes out a bank loan to pay its suppliers.
    C. A customer pays its overdue bills.
    D. The firm uses cash to purchase additional inventories.

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    Solution Preview

    Current Ratio = Current Assets(CA) / Current Liabilities (CL)
    This ratio will move up if Current Assets increase or CL decrease and will move down if CA decrease or CL increases. We will see the effect based on this -

    a. Inventory is sold - Inventory is a current asset and if it is sold, inventory will reduce and so will current assets. When inventory is ...

    Solution Summary

    The solution explains the effect on the current ratio of some of the actions taken by a firm.