Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 10 - Reporting and Analyzing Liabilities - Questions: 23

Answer

In case Melton increases the inventory, it will not change the ratio. The increase in inventory if made by cash payment, the increase will be compensated by reduction in cash, so there will be no change in current assets. If the Inventory is purchased on credit, with the increase in inventory, there will be an increase in Accounts payable with same amount. Hence the current assets and current liabilities will be increased by same amount. The ratio of 1:1 will therefore remain same.

Work Step by Step

Current ratio can be increase by increase in current assets from long term liabilities.
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