ACCA Applied Knowledge · Financial Accounting · Ratios
Brook Co has current assets of $300,000 and a current ratio of 1.5:1. It uses $50,000 of its cash to repay a trade payable. What is the current ratio after this transaction?
The current ratio rises to 1.67:1. Original current liabilities were $200,000 ($300,000 divided by 1.5). Paying $50,000 reduces both current assets and current liabilities, giving $250,000 over $150,000. When a ratio exceeds 1, equal reductions in both increase it.
- A1.67:1Correct
- B1.50:1
- C1.25:1
- D1.33:1
Explanation
Current liabilities = 300,000 / 1.5 = 200,000. After paying $50,000 cash, current assets are 250,000 and current liabilities 150,000. Ratio = 250,000 / 150,000 = 1.67. Leaving the ratio at 1.50 ignores that equal reductions on both sides change a ratio above 1.
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