Financial Statement Analysis – MCQ

Practice Question

Intro to Financial Accounting
Reporting and Interpreting Financial Information
Financial Statement Analysis
MCQs

If a company’s current liabilities increased by $20,000 while current assets remained unchanged, what would happen to the current ratio?

  1. The current ratio would increase.
  2. The current ratio would decrease.
  3. The current ratio would stay the same.
  4. There would be no impact on the current ratio.
Answer +
Correct Answer: B
Explanation +

The current ratio is calculated as Current Assets ÷ Current Liabilities. If liabilities increase while assets remain the same, the denominator increases and the overall ratio decreases.

This decline indicates a weaker short-term liquidity position, meaning the company may have a reduced ability to meet its short-term obligations.