Transactions Affecting Current Ratio

Steps:

• Recall current ratio formula: Current Assets (CA) / Current Liabilities (CL).
• Evaluate each option's impact on CA and CL.
• Identify changes that increase the ratio (higher CA or lower CL).
• Select the option reducing CL without altering CA.

Why C is correct:

• Overdraft is a current liability; converting it to a long-term loan removes it from CL (per accounting standards), decreasing the denominator and increasing the ratio.

Why the others are wrong:

• A: Increases CA (inventory) and CL (payables) equally, leaving ratio unchanged.
• B: Increases non-current assets (machinery) and CL (payables), raising denominator and decreasing ratio.
• D: Decreases receivables but increases cash by the same amount, so CA and CL unchanged, ratio stable.

Final answer: C