If Current Assets Decrease And Current Liabilities Increase The Current Ratio | MCQ Answer

The correct answer is (A), as when Current Assets decrease and Current Liabilities increase, the Current Ratio decreases as shown from below example:

Suppose in the 2022, the balance sheet of ABC Company shows Current Assets = $80 and Current Liabilities = $50

Current Ratio = Current Assets / Current Liabilities = $80 / $50 = 1.6%

Suppose, In 2023, Current Assets decreased to $60 and Current Liabilities increased to $70 (from balance sheet of ABC Company)

Now we have:

             Current Ratio = Current Assets / Current Liabilities = $60 / $70 = 0.85714%

So, the current ratio decreased from 1.6% to 0.85714%

Hence, it is proved that Current Ratio decreases when current assets decrease and current liabilities increase or the lesser the current assets are, the lesser is current ratio and vice versa.  The more the current liabilities are, the lesser is current ratio and vice versa.