PROBLEM 2 a. Modern Medical Devices has a current ratio of 0.5. Which of the fol
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Question
PROBLEM 2
a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve
(i.e., increase) this ratio?
- Use cash to pay off current liabilities.
- Collect some of the current accounts receivable.
- Use cash to pay off some long-term debt.
- Purchase additional inventory on credit (i.e., accounts payable).
- Sell some of the existing inventory at cost.
b. Assume that the company has a current ratio of 1.2. Now, which of the above actions would improve this ratio?
0.5
1.2
PROBLEM 2
a. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve
(i.e., increase) this ratio?
- Use cash to pay off current liabilities.
- Collect some of the current accounts receivable.
- Use cash to pay off some long-term debt.
- Purchase additional inventory on credit (i.e., accounts payable).
- Sell some of the existing inventory at cost.
b. Assume that the company has a current ratio of 1.2. Now, which of the above actions would improve this ratio?
0.5
1.2
Explanation / Answer
Answer for question 1
If company wants to improve its current ratio then company has to either increase it current assets which includes, inventory, account receivable, Cash, and marketable securities or decrease its current liabilities which includes according payable, accrued income, and short term loan.
So company should Purchase additional inventory on credit. By this ways current asset will increase.
Answer fro question 2
If company current ratio is 1.2 then Purchase additional inventory on credit improve the current ratio.
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