Question

What will be the impact of ‘Bills Payable given to Creditors’ on a liquid ratio of 1 : 1? State with reason.

Answer 1

When bills payable are given to creditors at a liquid ratio of 1 : 1, the ratio increases. This is due to a fall in both liquid assets and current liabilities, but the reduction in liabilities is larger, improving the company’s capacity to satisfy short-term obligations using liquid assets.