Question

What will be the impact of ‘Cash Paid to Trade Payables’ on a Current Ratio of 2 : 1? State the reason.

Answer 1

Cash paid to trade payables decreases both current assets and current liabilities. Since both current assets and current liabilities are reduced by the same amount, the current ratio remains constant. If the current ratio is 2 : 1 and current assets and liabilities decrease equally, it will remain 2 : 1. The current ratio is obtained by dividing current assets by current liabilities, and when both are reduced by the same amount, the proportion does not change.