Question

Lincoln Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?a. Use cash to reduce long-term bonds outstanding.b. Borrow using short-term notes payable and use the cash to increase inventories.c. Use cash to reduce accruals.d. Use cash to reduce accounts payable.e. Use cash to reduce short-term notes payable.

Answer 1

Answer:

b. Borrow using short-term notes payable and use the cash to increase inventories

Explanation:

The current ratio indicates the current assets and the current liabilities that reflect the liquidity position of the company. It means the items are converted into cash within one year.

The current assets include cash, account receivable, inventories, prepaid expenses, etc

And, the current liabilities include account payable, wages payable, salary payable, etc

In order to raise the current ratio, we have to borrow the short term note payable and use the cash so that inventories should be increased. By considering this, the current ratio should be increased