Florida General Contractor Practice Exam

The current ratio of a company is too low. Which of the following options should be considered to raise the current ratio?

1. Increase long-term debt

2. Sell short-term investments

3. Collect accounts receivable faster

4. Invest in fixed assets

The correct answer is: Collect accounts receivable faster

To improve the current ratio, which is a measure of a company's short-term liquidity and is calculated by dividing current assets by current liabilities, focusing on enhancing the company's current assets is critical. When a company collects accounts receivable faster, it converts these receivables into cash more swiftly, thereby increasing the amount of cash available in current assets. As current assets increase while current liabilities remain constant, the current ratio improves. This approach effectively enhances liquidity without negatively impacting the company's operational capacity. In comparison, increasing long-term debt might not directly influence current assets or could even raise current liabilities, which may further lower the current ratio. Selling short-term investments could decrease current assets if those investments were liquid assets, which would also worsen the current ratio. Investing in fixed assets typically involves using cash or other current assets, which could deplete the current assets and reduce the current ratio. Therefore, accelerating the collection of accounts receivable is the most effective strategy for improving the current ratio.