The current ratio of a firm is 3 : 1. Identify how the payment of current liability will affect it.

Improve current ratio

The correct answer is Option (1) → Improve current ratio.

Current ratio = 3:1
Let us assume current assets are 30,000 and current liabilities are 10,000.
If payment of 5,000 of current liability is paid then it reduces cash in current assets and liability in current liabilities.
New current assets = 30,000 - 5,000
                               = 25,000
New current liabilities = 10,000 - 5,000
                                   = 5,000
New current ratio = 25,000/5,000
                            = 5:1
Means current ratio improve.