One problem with ratio analysis is that relationships can be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.
Answer the following statement true (T) or false (F)
False
Rationale: The key here is to recognize that if the CR is greater than 1.0, then a given increase in both current assets and current liabilities would lead to a decrease in the CR. The reverse would hold if the initial CR were less than 1.0. Here the initial CR is greater than 1.0, so borrowing on a short-term basis to build the cash account would lower the CR. For example:
| Original | New | Old | New | ||
| CA/CL | Plus $1 | CA/CL | CR | CR | |
| 3/2 | 1/1 | 4/3 | 1.50 | 1.33 | CR falls if initial CR is greater than 1.0 |
| 2/3 | 1/1 | 3/4 | 0.67 | 0.75 | CR rises if initial CR is less than 1.0 |
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