current ratio question

P

Philly7575

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
Skipper Enterprises runs half-day yacht tours off the coast of Oahu. To meet borrowing covenants in the operating line of credit, accountant Gilligan Whitecap must somehow increase the current ratio above the current level of 1.4. Of the following options, Whitecap is most likely to:

A) use cash to retire a short term note payable to creditor Thurston.

B) sell marketable securities (price equal to book value) for cash.

C) purchase supplies on credit.

D) ask employees Hinkley, Summer, and Grant to go an extra week without being pa


Answer is A. if you decrease cash and increase a liability wouldn't the ratio stay the same?
 
why current liabilities increase? Retiring short-term notes payable means paying them out. So if (CA-cash)/(CL-notes payable retired) > (CA/CL)
 
no...just plug a scenario into your calculator.

ie.

1.4/1=1.4 now offset the ST Note by using 1.0/0.6=1.67

Plugging in some numbers can sometimes make it clearer if you have trouble visualizing it.
 
acumenjay1, that's an idea with plug numbers...easier to understand...before that I was playing like 10/9 >=< 9/8...smth like this, what took me more time to figure out...now it must be easier. Thanks
 
I meant to write " decrease a current asset (cash) to DECREASE a current liability wouldn't the ratio stay the same?"

Thanks acumenjay1. That does help!
 
Yes, sometimes putting numbers in really saves time... you gotta be fast though....

Already nice examples so I won't give any...
 
hi
The current ratio here is 1.4. when the ratio is greater than 1 , an equal change in both the numerator and denominator would cause a further increase in the ratio. so when cash is used to retire short term payable, the numerator and denominator gets decreased by an equal amount and hence the resultant ratio is higher than the current level of 1.4.
right??
 
current assets/current liabilities;

$25,000/$10,000 = 2.5

Use $5,000 to pay notes.

$20,000/$5,000 = 4
 
With problems like this keep it simple. If they say its 1.4 then just use 14/10.


One of the tricks with the "what happens if you adjust the numbers" types of questions is to use an extreme case, because it makes the answer clearer (kinda hard to explain without an example). If you have an interest rate or forex question and you need to conceptually see what happens if rates move in a given direction, play around with a huge move, not a small one. Keep this in the back of your mind and when the right probelm comes along you'll see how to apply it.

In this case if you say that you paid off all but one dollar you'd have a current ration of 5 which is clearly a huge improvement in current ratio.

The other important thing to realize in this question is that in answer choice D, Hinckley was the last name of the professor on Gilligan's Island (okay, in my geeky world its important)
 
You must log in or register to reply here.
Back
Top