A firm seeks to increase its current ration from 1:5 before its
closing date of the accounts. The action that would make it
possible is :
(a) Delaying payment of salaries
(b) Increase charge for depreciation.
(c) Making cash payment to creditors.
(d) Selling marketable securities for cash at book value.
Answers
Answer:
making cash payment to creditors
Answer:
Answer is Option c
Making Cash Payment to creditors
Creditor is a current liability, paying off creditors reduces current liabilities which leads to increase in current assets and Current ratio can be increased from 1:5 before closing date of accounts.
Explanation:
Payment of Salaries is a profit & loss item and not related to Current ratio.
Increase in charge for depreciation reduces the value of asset in the balance sheet, Depreciation is charged for fixed assets and not current assets which is not related to current ratio.
Selling marketable securities at book value for cash is a loss and not help in increasing the current ratio.
More about current ratio explained below
The current ratio, commonly referred to as the working capital ratio, assesses a company's capacity to pay short-term debt that is due within a year. The weight of total current assets compared to total current liabilities is taken into account in the ratio. It shows how a company's finances are doing and how it can use its current assets' maximum liquidity to pay off debt and other obligations. The liquidity of a corporation can be simply determined using the current ratio formula.
Current Ratio = Current Assets/ Current Liabilities
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