If a company's current ratio is 1.8 and it uses cash to pay off short-term notes payable, what will happen to its current ratio?

When a company has a current ratio of 1.8, it means that its current assets are 1.8 times greater than its current liabilities. If the company uses cash—a current asset—to pay off short-term notes payable, which are current liabilities, both the numerator (current assets) and the denominator (current liabilities) of the current ratio formula are affected.

Specifically, when cash is used to pay down current liabilities, the cash amount reduces the total current assets and the total current liabilities. However, because the current liabilities decrease while the current assets decrease by the same amount (the cash used), the reduction in liabilities has a more substantial proportional effect on the current ratio since the starting ratio was above 1.

The formula for the current ratio is: Current Ratio = Current Assets / Current Liabilities

In this scenario, after paying off the short-term notes, the company has reduced both its current assets (by the cash paid) and current liabilities (by the same cash amount). Since the cash payment reduces the liabilities but preserves more of the asset backing the remaining portion of liabilities, the overall current ratio will actually increase, as the reduction in liabilities has a larger impact relative to the decrease in assets.

Thus, when the company pays