ACT Company has a current ratio of 1.2:1. What respective effects will the borro

Question

ACT Company has a current ratio of 1.2:1. What respective effects will the borrowing of cash by taking out a short-term loan and the collection of accounts receivable have on the company’s current ratio?

                                               Short-term Borrowing             Collection of Receivable

Option A                                    Increase                                   No effect

Option B                                    Increase                                   Increase

Option C                                    Decrease                                  Decrease

Option D                                    Decrease                                  No effect

Answer:

Option A

Option B

Option C

Option D

Explanation / Answer

correct option is "D" -Decrease and no effect.

Collection of receivable will decrease accounts receivable and increase cash so no effect on current asset and liabilities .

Short term borrowing will increase cash (current asset) as well as current liabilities.

leading to fall in ratio.

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