why,the ans is

[vc]

52. A company�s current ratio is 2.0. If the company uses cash to retire notes payable that are due within one year, would this transaction most likely increase or decrease the current ratio and asset turnover ratio, respectively?
Current ratio Asset turnover ratio
A. Increase Increase
B. Increase Decrease
C. Decrease Increase
D. Decrease Decrease

 

[Salil]

Cash is a Current Asset and the Notes payable in one year is a Current Liability.

Current Ratio = Current Asset / Current Liability = 2 / 1

Since Current Assets and Liabilities are reduced by the same amount the current ratio will now be = 2 - x / 1 - x

Since the denominator is less than 1, the ratio will increase.

Since, assets reduce the asset Turnover will increase

Therefore answer is B.

 

[Salil]

sorry, its A

 

[jbnjc]

When all else fails, plug in some numbers:

Current Ratio = 2 = ca 10 / cl 5

If you pay off CL (current part of notes payable due within 1 year) you reduce both your numerator and denominator.. plug in some numbers, say current notes payable due is 2, reduce ca by 2 and cl by 2 you get 8/3 = 2.66 so your Current Ration increases, exam strategy says answer has to be A or B

Total Asset Turnover is Net Sales / Avg Total Assets, plug in some numbers, you are in effect decreasing your denominator because you decreased total assets by paying off current libilities, smaller denominator into same numerator means larger number. The anwser is A

 

[killamanjaro]

Answer is A.

Current Ratio is dividing a bigger number by a smaller number. Reducing cash to pay notes payable decreases both by the same amount but not by the same proportion. CA equals 10 (cash equals 2). CL equals 5 (notes payable equals 2).

Cash is 20 percent of CA. NP is 40 percent of CL.

100 percent of CA divided by 100 percent of CL equals 1.

80 percent of CA divided by 60 percent of CL equals 1.33

That's how I do it without having to plug in numbers.

*shrugs*