The following information concerning the current assets and current liabilities of
Mason Company at December 31, 2017, is presented below.
$\begin{array}{lrr}
\text { Current Assets }\
\text { Cash } & & \$ 6,700 \
\text { Accounts Receivable } & \$ 7,900 & \
\text { Less Allowance } & \underline{ (70) }& 7,830 \
\text { Inventory } & & 2,270 \
\text { Prepaid expenses } & & \underline{500} \
\text { Total }& & \underline{\$17,300}\
\
\text { Current Liabilities }\
\text { Accounts payable } && \$ 9,000 \
\text { Wages payable } && 500 \
\text { Taxes payable } & &200 \
\text { Rent payable } & &1,600 \
\text { Notes payable } &&\underline{ 2,000} \
\text { Total } &&\underline{ \$ 13,300}
\end{array}$
Based on this information, how would the current ratio be affected if Mason collects some accounts receivable and then uses $9,000 cash to pay off the accounts payable?
A)The current ratio would increase from 1.30 to 1.93.
B)The current ratio would increase from 0.74 to 4.02.
C)The current ratio would decrease from 1.30 to 0.62.
D)The current ratio would increase from 1.09 to 1.61.

Question

Quizplus · Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. Currently, Mason Company's current ratio is:

$50,000 + $20,000 + $10,000 / $30,000 + $20,000 = 1.3

If Mason collects some accounts receivable, current assets will increase and if they use $9,000 cash to pay off accounts payable, current liabilities will decrease. Let's see how this affects the current ratio:

New current ratio = ($50,000 + $24,000 + $10,000) / ($21,000 + $11,000) = 1.93

Therefore, the current ratio would increase from 1.3 to 1.93. The correct answer is A.

The Following Information Concerning the Current Assets and Current Liabilities