US CMA Part 2 · Chapter 1 · Question 5 of 15
Dunmore Corp. has a current ratio of 1.6. If the company uses cash to pay an account payable, what will be the effect on the current ratio and on net working capital?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) The current ratio increases and net working capital is unchanged
Explanation
Paying a payable reduces current assets and current liabilities by the same amount, so net working capital (current assets minus current liabilities) does not change. When the current ratio is above 1, reducing numerator and denominator by the same amount raises the ratio. For example, 160/100 = 1.6 becomes 150/90 = 1.67 after a payment of 10.
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