Florida General Contractor Practice Exam

If the current ratio is too low, it might be raised by?

1. Reducing current liabilities

2. Reducing total assets

3. Increasing accounts payable

4. Increasing inventory

The correct answer is: Reducing current liabilities

Raising the current ratio can be effectively achieved by reducing current liabilities. The current ratio, which is calculated as current assets divided by current liabilities, measures a company's ability to meet its short-term obligations. If current liabilities are decreased while current assets remain the same, the quotient will increase, thereby improving the current ratio. This approach is particularly valuable because it directly impacts the denominator of the ratio, leading to a more favorable financial condition as it indicates that the company has a stronger liquidity position. This can be achieved through various means, such as paying off short-term debts or negotiating for extensions on payments. In contrast, altering other elements like total assets, accounts payable, or inventory may not effectively raise the current ratio or could have unintended consequences. For instance, reducing total assets could lower current assets, which might maintain or even decrease the current ratio, depending on how it affects the balance. Increasing accounts payable actually raises current liabilities, which would decrease the current ratio rather than improve it. Lastly, increasing inventory might boost current assets, but if current liabilities remain static or increase concurrently, the current ratio may not improve significantly.