General Hospital has a current ratio of 0.5. Which of the following actions woul
ID: 2629488 • Letter: G
Question
General Hospital has a current ratio of 0.5. Which of the following actions would im- prove (increase) this ratio? (Hint: Create a simple balance sheet that has a current ratio of 0.5. Then, judge how the transactions below would affect the balance sheet.)
1. Use cash to pay off current liabilities. 2. Collect some of the current accounts receivable. 3. Use cash to pay off some long-term debt. 4. Purchase additional inventory on credit (i.e., accounts payable). 5. Sell some of the existing inventory at cost (book value).
Now assume that General Hospital has a current ratio of 1.2. In this situation, which of the above actions would improve this ratio?
Explanation / Answer
Current ration =0.5
1. Use cash to pay off current liabilities. - Decrease
2. Collect some of the current accounts receivable. - No change
3. Use cash to pay off some long-term debt. - Decrease
4. Purchase additional inventory on credit (i.e., accounts payable). - Improve
5. Sell some of the existing inventory at cost (book value).- No change
Current ratio =1.2
1. Use cash to pay off current liabilities. - Improve
2. Collect some of the current accounts receivable. - No change
3. Use cash to pay off some long-term debt. - Decrease
4. Purchase additional inventory on credit (i.e., accounts payable). - Decrease
5. Sell some of the existing inventory at cost (book value).- No change
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