Due to a change in accounting standards, TRK Construction’s QSPE must now be consolidated. Assume the current ratio before consolidation is 1.10. Consolidation will most likely result in which of the following: A) an increase in the current ratio. B) a decrease in the current ratio. C) no change in the current ratio. Your answer: A was incorrect. The correct answer was B) a decrease in the current ratio. Can someone please explain. I don’t get it!!!
See it like this: Lets assume TRK construction current assets are $1100 and current liabilities are $1000. So current ratio = 1100/1000 = 1.1 If we consolidate QSPE of $400, it will increase both current assets and liabilities by $400. So current ratio = 1500/1400 = 1.07
When you consolidate - both your current assets + current liabs are going to increase. They give you current ratio was 1.10 say CA=110, CL=100 Now CA increases by 10, CL increases by 10 CA=120, CL=110 120/110 = 1.09 this is a recognition of the math principle that A/B shrinks when a common number is added to both numerator and denominator if A/B > 1 and increases if A/B < 1 If it had been 0.9 90/100 100/110 = 0.91 > 0.9
Great! Thank you so much. I think I need a break and clear my head! A