Posted: 07 Jun 2009 at 21:17  IP Logged



Hey, we've all been there. It's easy to get so caught up in studying you start over analyze things.
Both the current ratio and the quick ratio have CURRENT liabilities in the denominator, so the reduction in the note payable does reduce the note payable, but does not impact the calculation :)
Some #s to make up:
Current Assets (all) 200,000 Cash, Net A/R, MES 125,000
Current Liabilities & amp; amp; amp; amp; amp; nbsp; 50,000
Say you pay off $10,000 of a long term note
Current ratio before note paid is 4 (200,000/50,000) current ratio is current assets/current liabilities
Quick ratio before note paid is 2.5 (125,000/50,000) quick ratio is cash, net ar, marketable equity securities (a number lesser than TOTAL current assets)
After note is paid off
Current ratio 190,000/50,000 3.8
Quick ratio 2.3
Denominator never changes because reduction is note payable is applicable to a long term liability, not a short term liability
current ratio % decrease is 4.03.8/4.0 = 5%
quick ratio % decrease is 2.52.3/2.5 = 8%, thus a greater impact on the quick ratio
hope this helps :)
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