If a Company Uses Cash to Pay Off Some of Its

question 70

Multiple Choice

If a company uses cash to pay off some of its accounts payables, what effect will this have on its liquidity ratios, given that the ratios exceeded 1.0 before the payoff?

• A)The quick ratio and current ratio will both increase
• B)The quick ratio and the current ratio will both decrease
• C)The quick ratio will increase but the current ratio will remain unchanged
• D)The current ratio will increase but the quick ratio will remain unchanged

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Definitions:

Goodwill

The intangible asset that represents the excess value of a company beyond its physical assets and liabilities, often arising from acquisitions.

Tax-Free Transaction

A financial transaction that does not result in a tax liability for any of the parties involved.

Fair Value

The selling price of an asset or the price to take on a liability in a coordinated market transaction at the time of measurement.

Intra-Entity Gains

Profits resulting from transactions within the same entity or between entities under common control, which are not realized in the consolidated financial statements until sold to an external party.