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April 2005 no 2 - current ratio

N

nad07

Member
If a company expects to have net current liabilities. When raising funds by taking a short term loan will increas current liabilities no? Then why would this increase the current ratio?
 
If a company has net current liabilities, this means that current assets are less
than current liabilities. Thus the current ratio as it stands (current assets / current liabilities) would be a positive number less than 1. If the company raises cash through a short-term loan, both the current assets would rise (due to the cash raised) and the current liabilities would rise (due to the addition of the short-term loan). Thus the current ratio would rise.

It is straightforward to construct a simple example. Consider A=10, L=12. Now add 1 to both A and L and calculate the CRs.
 
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