A firm has a Current Ratio of 1.31 and a Quick Ratio of 0.53. If the firm utilizes cash to pay off a portion of its Accounts Payable, what is the impact on these ratios?

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SSC Audit Tax Finance P-II QUESTION #6184

Question 1

A firm has a Current Ratio of $1.31$ and a Quick Ratio of $0.53$. If the firm utilizes cash to pay off a portion of its Accounts Payable, what is the impact on these ratios?

Both ratios will decrease.
Both ratios will increase.✔️
The Current Ratio will increase, but the Quick Ratio will decrease.
Both ratios will remain unchanged.

Correct Answer Explanation

If the Current Ratio is greater than $1$, paying off debt with cash increases the ratio because the numerator and denominator decrease by the same amount, moving the ratio further from $1$ [cite: 36, 38].

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