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What will be the effect on current ratio if a bills payable is discharged on maturity?
- a)It will increase
- b)It will decrease
- c)Either (a) or (b)
- d)Can't say
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
What will be the effect on current ratio if a bills payable is dischar...
Effect of Discharging Bills Payable on Current Ratio
When a company discharges its bills payable on maturity, it means that it pays off its short-term debt obligations. This has an impact on the current ratio of the company, which is a measure of a company's short-term liquidity.
Current Ratio
The current ratio is calculated by dividing the current assets by the current liabilities of a company. It measures a company's ability to pay off its short-term debt obligations using its current assets. A higher current ratio indicates a better ability to pay off short-term debts.
Impact of Discharging Bills Payable on Current Ratio
When a company discharges its bills payable on maturity, it reduces its current liabilities. This means that the denominator of the current ratio decreases. However, the numerator of the current ratio remains the same as the current assets are not affected.
As a result, the current ratio increases. This indicates that the company has a better ability to pay off its short-term debts using its current assets. Therefore, option A is correct - the effect of discharging bills payable on maturity is that it will increase the current ratio.
Conclusion
In conclusion, discharging bills payable on maturity has a positive impact on a company's current ratio. It increases the current ratio, indicating a better ability to pay off short-term debts using its current assets.
When a company discharges its bills payable on maturity, it means that it pays off its short-term debt obligations. This has an impact on the current ratio of the company, which is a measure of a company's short-term liquidity.
Current Ratio
The current ratio is calculated by dividing the current assets by the current liabilities of a company. It measures a company's ability to pay off its short-term debt obligations using its current assets. A higher current ratio indicates a better ability to pay off short-term debts.
Impact of Discharging Bills Payable on Current Ratio
When a company discharges its bills payable on maturity, it reduces its current liabilities. This means that the denominator of the current ratio decreases. However, the numerator of the current ratio remains the same as the current assets are not affected.
As a result, the current ratio increases. This indicates that the company has a better ability to pay off its short-term debts using its current assets. Therefore, option A is correct - the effect of discharging bills payable on maturity is that it will increase the current ratio.
Conclusion
In conclusion, discharging bills payable on maturity has a positive impact on a company's current ratio. It increases the current ratio, indicating a better ability to pay off short-term debts using its current assets.
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Community Answer
What will be the effect on current ratio if a bills payable is dischar...
Repayment of bills payable will reduce current assets and liabilities by the same amount. This will improve the current ratio.
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