Question

Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio?

	a.	Use cash to reduce accounts payable.
	b.	Borrow using short-term notes payable and use the proceeds to reduce accruals.
	c.	Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
	d.	Use cash to reduce accruals.
	e.	Use cash to reduce short-term notes payable.

Answer 1

Company's current ratio = Current assets/Current liabilties

If the company borrows using short-term notes payable and use the proceeds to reduce long-term debt. In this transaction, borrowing using short-term notes payable will increase the current liability and paying the long-term debt using this fund will reduce the long-term borrowings and not current liability. In a result, increase in the current liabilities will reduce the current ratio.

Correct answer: Option c