Information

 
Question
CPA-03994


 
Answer
This question specifically talks about financing PERMANENT current assets with short term debt (a current liability). Permanent current assets implies that you CANNOT liquidate those current assets in order to cover current liabilities should you need to..... Since the premise of ratios like the current ratio is that you want to know what you have available in current assets to satisfy current liabilities if needed, a permanent current asset is going to improve your current ratio BUT is never going to be used to satisfy current liabilities. Imagine an extreme (and unrealistic) situation where all current assets are permanent.....you literally would never be able to pay any current liabilities unless you sold long-term assets....very risky.
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