Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

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Prepare for the CPA Auditing and Attestation Exam. Leverage comprehensive materials, flashcards, and detailed explanations for each question. Master essential auditing concepts and techniques with confidence!

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In auditing, what does an increased current ratio after cash payments predominantly indicate?

Reduced financial obligations
Improved liquidity ratios
Negative revenue flow
Increased credit risk

The correct answer is: Improved liquidity ratios

An increased current ratio after cash payments predominantly indicates improved liquidity ratios. The current ratio, calculated as current assets divided by current liabilities, serves as a measure of a company's ability to meet its short-term obligations. When cash payments are made, it usually leads to a decrease in current liabilities, particularly if the payments are settling debts or obligations, while current assets might remain stable or increase due to improved cash flow management. As current liabilities diminish in comparison to current assets, the current ratio improves, reflecting a stronger liquidity position. This shows that the company is in a better position to cover its short-term debts, which is crucial for maintaining operational stability. Improved liquidity ratios suggest enhanced financial health and reassure stakeholders that the company can meet its obligations as they come due.