Bottom line answer (disclaimer; didn’t read above, sorry), in basic arithmetic:
Numerator is a multiple of the denominator. This means, that if you transfer an equal denominator value to the numerator, the overall multiple will increase.
Think of it this way. Current ration now = let’s say 100/99 (which equals 1.010101); now you reduce both denominator and numerator by 1 to 99/98. This will equal 1.0102.
Hopefully this helps marginally (bad example I know), but if you try using just simple numbers where the numerator and denominator decrease by the exact same value, the overall multiple will increase.
Better e.g. not related to current ratio; 4/2… 4-1 = 3 ; 2-1 = 1. Now = 3/1.
If the current ratio is greater than one, then current assets exceed current liabilities. Let’s look at each answer:
A. If you collect on accounts receivable and deposit the funds in the cash account, then A/R goes down by some amount, and cash goes up by the same amount. Current assets don’t change (cash and A/R are both current assets), and current liabilities don’t change (nothing’s happening on the liability side), so the current ratio stays the same.
B. If you buy fixed assets for cash, then cash decreases and fixed assets increase by the same amount. Fixed assets aren’t current assets, so current assets decrease, but current liabilities don’t change (nothing’s happening on the liability side); the current ratio decreases.
C. If you pay accounts payable with cash, then cash decreases and A/P decreases by the same amount. Cash is a current asset, so current assets decrease; A/P is a current liability, so current liabilities decrease by the same amount. To see why this makes the current ratio increase, it’s easiest to try some numbers:
Current assets = $100
Current liabilities = $80
Current ratio = $100 / $80 = 1.25 (greater than one)
Suppose that you pay $30 of A/P with $30 cash, then:
Current assets = $70 (= $100 – $30)
Current liabilities = $50 (= $80 – $30)
Current ratio = $70 / $50 = 1.4, which is greater than 1.25
The current ratio has increased. The reason is that the $30 is a bigger percentage of the current liabilities than of the current assets.
If the current ratio had started at one, after paying A/P with cash it would remain at one: unchanged.
If the current ratio had been less than one, after paying A/P with cash it would decrease.
Not using real numbers is where I messed up. I keep thinking, how does the ratio increase, if you need to make an equal increase/decrease in the cash account and AP account.
