Question

An entity's current ratio will be influenced by:

• issuance of a stock dividend.

• the inventory cost flow assumption used.

• the depreciation method used.

• writing off an overdue account receivable against the allowance for uncollectible accounts.

Answer 1

Current ratio is the ratio between current assets with current liabilities. This ratio is affected if there is any effect on current asset or current liabilities. Issuance of stock dividend does not have any impact on current asset or current liability.

Same is with the depreciation method used as it will affect the fixed asset and not the current asset. Moreover writing off an overdue account receivable against the allowance for uncollectible accounts will have an equal impact on the current asset as well as current liability.

the inventory cost flow assumption used will have any impact whether the inventory is to be recorded as per FIFO method lifo method average method of specific identification method. therefore the current ratio will be influenced by the inventory cost flow assumption used.

Therefore the correct option is 2nd.

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