Does This Transaction Increase or Decrease the Current Ratio?
You can solve current-ratio questions without memorizing every transaction if you compare the starting ratio with the amount added or removed.
Paying a current liability
Using cash to pay a current liability reduces both numerator and denominator. Whether the ratio rises or falls depends on the starting ratio.
Buying inventory on account
Current assets and current liabilities both increase by the same amount, which can push the ratio toward 1.0.
Collecting receivables
Cash replaces receivables, so total current assets generally do not change and the current ratio remains unchanged.
Exam strategy
Write the starting numerator and denominator, apply the transaction, and compare rather than relying on a memorized arrow.
The takeaway
Current ratio equals current assets divided by current liabilities. A transaction's effect depends on both the direction and the relative size of the amounts changed.
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FAQ
Does collecting accounts receivable usually change the current ratio?
No.
Can paying a payable increase the current ratio?
Yes when the starting ratio is above 1.0.
Does buying inventory on account always increase the ratio?
No.