Question

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

Answer 1

When cash paid to trade payables in a situation where the current ratio is 1 : 1, the ratio remains constant. This happens because the payment lowers both current assets and current liabilities by the same amount. since the numerator (current assets) and denominator (current liabilities) are reduced equally. As long as current assets and liabilities decrease in proportion, the current ratio will not change.