Current ratio Answer: d Diff: M

16. Van Buren Company has a current ratio = 1.9. Which of the following actions
will increase the company’s current ratio?

a. Use cash to reduce short-term notes payable.

b. Use cash to reduce accounts payable.
c. Issue long-term bonds to repay short-term notes payable.
d. All of the statements above are correct.
e. Statements b and c are correct.

Current ratio Answer: e Diff: M

17. Which of the following actions can a firm take to increase its current ratio?

a. Issue short-term debt and use the proceeds to buy back long-term debt
with a maturity of more than one year.
b. Reduce the company’s days sales outstanding to the industry average and
use the resulting cash savings to purchase plant and equipment. c. Use cash
to purchase additional inventory.
d. Statements a and b are correct.
e. None of the statements above is correct.

Ratio analysis Answer: c Diff: M

18. As a short-term creditor concerned with a company’s ability to meet its
financial obligation to you, which one of the following combinations of
ratios would you most likely prefer?

Current Debt
ratio TIE ratio
a. 0.5 0.5 0.33
b. 1.0 1.0 0.50
c. 1.5 1.5 0.50
d. 2.0 1.0 0.67
e. 2.5 0.5 0.71