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Cooney Corporation had $275,000 in current assets and $105,000 in current liabilities before borrowing $75,000 from the bank for a 6-month period.
-What effect did the borrowing transaction have on Cooney's current ratio?
A)The ratio remained unchanged.
B)The change in the current ratio cannot be determined.
C)The ratio decreased.
D)The ratio increased.

Question

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Cooney Corporation had $275,000 in current assets and $105,000 in current liabilities before borrowing $75,000 from the bank for a 6-month period.
-What effect did the borrowing transaction have on Cooney's current ratio?
A)The ratio remained unchanged.
B)The change in the current ratio cannot be determined.
C)The ratio decreased.
D)The ratio increased.

Quizplus · Accepted Answer

Before borrowing, the current ratio was (Current Assets/Current Liabilities) = ($275,000/$105,000) = 2.62. After borrowing, the current assets will increase to $350,000 ($275,000 + $75,000), while current liabilities remain unchanged at $105,000. The new current ratio will be 3.33 ($350,000/$105,000). Therefore, the borrowing transaction will decrease Cooney's current ratio.

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