QSPE question - Consolidaton and Current ratio

accounting, standards, following

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!!!

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ishfaque

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2^#

发表于 2013-4-3 10:02 | 只看该作者

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

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liquidity

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发表于 2013-4-3 10:05 | 只看该作者

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
If it had been 0.9
90/100
100/110 = 0.91 0.9

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disiz64

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4^#

发表于 2013-4-3 10:09 | 只看该作者

Great! Thank you so much. I think I need a break and clear my head!
A

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