Bicksler Corporation has a current ratio of 2.0 on July 21 of the current year. On July 22, Bicksler purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio of Bicksler?
A)The value of the current ratio will increase.
B)The value of the current ratio will decrease.
C)The value of the current ratio will equal the value of the quick ratio after the purchase.
D)The value of the quick ratio will be greater than the value of the current ratio after the purchase.
E)The value of the current ratio will not change.

Question

Quizplus · Accepted Answer

Purchasing raw materials on credit increases both current assets (inventory) and current liabilities (accounts payable), but because the current ratio is a measure of a company's ability to pay off its short-term liabilities with its short-term assets, the increase in liabilities without an increase in more liquid assets (cash, marketable securities) tends to decrease the current ratio.

Bicksler Corporation Has a Current Ratio of 2