Question

Walter Industries’ current ratio is 0.5. Considered alone, which of the following actions would increase the company’s current ratio?
a. Borrow using short-term notes payable and use the cash to increase inventories.

b. Use cash to reduce accruals.

c. Use cash to reduce accounts payable.

d. Use cash to reduce short-term notes payable.

e. Use cash to reduce long-term bonds outstanding.

Answer 1

Answer:

a. Borrow using short-term notes payable and use the cash to increase inventories.

Explanation:

The formula to compute the current ratio is shown below:

Current ratio = Total Current assets ÷ total current liabilities  

where,

The current assets = Cash and cash equivalents + Short-term investments + Accounts and notes receivable + Inventories + Prepaid expenses and other current assets

And, current liabilities would be

= Short-term obligations + Accounts payable

If the current ratio is 0.5 which means that the current asset is 1 and the current liabilities are 2 so the most appropriate option is a.