Under what conditions could a company artificially increase their current ratio at the end of their accounting reporting period by taking out a short term loan and placing the proceeds in the cash account

Question

Business

Phoenix Goodman

12 June, 17:17

Under what conditions could a company artificially increase their current ratio at the end of their accounting reporting period by taking out a short term loan and placing the proceeds in the cash account

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Answers (1)

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Jaylah · Answer 1

1) Prompt Submission of invoice

2) Removal of unnecessary assets

3) Bargain for a longer payment period

Explanation:

Current ratio measures the capability of a business or organisation to meet up to its short-term obligations that are due within a period of one year.

Conditions in which a company can increase its current ratio at the end of their accounting period include:

A) Prompt invoice submission:

Invoice should be submitted early to the customers. The more your accounts receivables increase and the quicker money is derived from your sales, the better your current ratio be and you will have much more money.

B) Removal of unnecessary assets:

All business has unproductive assets. Resources that are just lying there and wasting, resources that is not earning anything. It is advisable to dispose them off since they are not adding to your income.

C) Bargain for longer payment period:

Try and negotiate for a longer payment periods with your vendors and ask if you can be given discounts.