Question 7 of 50 CPZ Enterprises had the following account information: Accounts receivable $200,000 Accounts payable 80,000 Bonds payable, due in 1@ years 300,000 cash 12,200 Interest payable, due in three months 18,000 Inventory 400,000 Land 258,000 Notes payable, due in six months 50,000 Prepaid expenses 40,000 The company has an operating cycle of five months. What will happen to the current ratio and quick ratio if CPZ Enterprises uses cash to pay 50% of the accounts payable?© Both current ratio and quick ratio will increase. © Both current ratio and quick ratio will decrease. © Current ratio will increase and quick ratio will decrease. © Current ratio will decrease and quick ratio will increase. Question #200060 Incorrect The ratios will increase after the payoff of 50% of accounts payable because cash and accounts payable will be reduced in both ratios. Proof: oO Current assets (before) = Cash + Acc. rec. + Inventory + P.P. exp. = $100,900 + $200,000 + $490,000 + $40,000= $740,000 $60,000 + $200,000 + $400,000 + $20,000 = $700,000 (after) Current Liabilities (before) = Acc. payable + Int. payable + Notes pay. = $80,000 + $10,000 + $50,000 = $140,000 (after) = $40,000 + $20,208 + $50,000 = $120,000 @® Quick assets (before) = $108,000 + $200,000 = $340,000 (after) = $60,000 + $20,000 = $260,000 @ Quick Liabilities (before) = $80,080 + $10,000 + $50,000 = $120,008 (after) ~ $42,000 + $10,009 + $50,080 = $100,000 Current ratio (before) = $740,080/$140,000 = 5.23 (after) = $700, 000/$100, 000 = 7.00 Quick ratio (before) = $300,600/$140, 000 (after) = $260, 000/$100, 000 2s Note: Both ratios increase, CMA - Liquidity RatiosRelevant Terms Current Assets Current Ratio Quick Assets Quick Ratio References urgent CMA Exam Refer 2121.03