Chua Company has has a current ratio of 2.5 and the following assets on December 31, 2017: $\begin{array}{lr}
\text { Cash } & \$ 300,000 \
\text { Accounts receivable, net } & 600,000 \
\text { Inventory } & 960,000 \
\text { Prepaid expenses } & 25,000 \
\text { Equipment, net } & 2,200,000 \
\hline \text { Total assets } & \$4,085,000
\end{array}$ The company paid an account payable of $175,000 immediately on January 1, 2018.What effect did this have on the current ratio?
A)An increase to 2.95
B)There was no effect since both cash and accounts payable changed by the same amount.
C)An increase to 2.50
D)A decrease to 2.26

Question

Quizplus · Accepted Answer

The correct answer is A.The current ratio is calculated by dividing current assets by current liabilities. When Chua Company paid the account payable, its current assets decreased by $175,000 and its current liabilities decreased by the same amount. This means that the current ratio remained the same. However, the current ratio is now calculated using the new current assets and current liabilities, which are $3,910,000 and $1,325,000, respectively. This results in a current ratio of 2.95.

Chua Company Has Has a Current Ratio of 2 The Company Paid an Account Payable of $175,000 Immediately on the Following