An organization is in a liquidity crisis, and they opted to draw on their credit line to increase...

Question

An organization is in a liquidity crisis, and they opted to draw on their credit line to increase cash holdings. The credit line loan has a maturity of 3 years, and no payments are due before 3 years (other than interest payments). What should happen to this company's current, quick and cash ratios? (Word limit is 300 words.)

Rochak · Accepted Answer

Drawing credit during a liquidity crisis has significant implications for the organization's liquidity ratios, including the current, quick, and cash ratios.
The current ratio measures a company's ability to meet its short-term obligations using its current assets. An increase in cash holdings resulting from drawing on a credit line can increase the company's current assets, which in turn would increase its current ratio. However, if the company's current liabilities also increase, the increase in the current ratio may not be significant or may be temporary.

An organization is in a liquidity crisis, and they opted to draw on their credit line to increase cash holdings. The credit line loan has a maturity of 3 years, and no payments are due before 3 years...

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