Practice prompt · Q:transactions-to-statements/current-ratio-001

Pay a payable and watch two metrics diverge

Formative check on the current ratio and working capital effects of an equal Cash and Accounts Payable reduction.

Updated Aug 6, 2026 Review due Nov 6, 2026

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Northstar has $120,000 current assets, including $30,000 Cash, and $80,000 current liabilities, including $50,000 Accounts Payable. It pays $20,000 of the payable with Cash, with no discount, fee, borrowing, or other transaction. What happens immediately?

Choose the best answer. A Working capital remains $40,000; the current ratio rises from 1.50 to approximately 1.67; Cash and Accounts Payable each fall $20,000. B Working capital rises to $60,000 because paying a liability removes it from the subtraction. C The current ratio remains 1.50 because working capital did not change. D Liquidity is proven stronger because any increase in the current ratio is favorable, even though Cash falls to $10,000.

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Answer: A

Before payment, working capital is $40,000 and the current ratio is 1.50. After reducing Cash and Accounts Payable by $20,000, current assets are $100,000 and current liabilities are $60,000. Working capital remains $40,000 and the ratio is approximately 1.67. Choice A is correct; the direction alone does not prove practical liquidity improved.