A company's current ratio is 2:1. Which of the following transactions would increase the current ratio?

Correct answer: A) Paying a trade payable from the bank balance

Explanation

When the ratio is above 1, an equal reduction in current assets and current liabilities increases it: for example, current assets of $200,000 and liabilities of $100,000 become $180,000 and $80,000 after a $20,000 payment, a ratio of 2.25:1. Buying inventory on credit increases both equally and lowers the ratio (220:120 = 1.83:1). Selling at cost for cash swaps one current asset for another, leaving it unchanged, and buying a machine reduces current assets only.