Question

What will be the impact of ‘Cash paid to Trade Payables’ on a Current ratio of 8 : 1? State with reason.

Answer 1

When cash is paid to trade payables at an 8 : 1 current ratio, the ratio increases. This is because both current assets and current liabilities decrease, but the reduction in current liabilities has a higher impact, increasing the proportion of current assets to current liabilities and so increasing the current ratio.