As of December 31, 2012, Grove Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, 2012, Grove paid $250 for transportation costs on merchandise it had received. Which of the following statements is incorrect?
A)Grove's current ratio will decrease
B)Grove's quick ratio will decrease
C)Grove's working capital will remain the same
D)Grove's quick ratio will decrease and its current ratio will remain the same.

Question

Quizplus · Accepted Answer

The transaction will increase a current asset (inventory) and decrease another current asset (cash).
Because there is an increase and a corresponding decrease in current assets, the current ratio (current assets/current liabilities) and working capital (current assets - current liabilities) will not change with this transaction. Inventory not included in quick assets, but cash is, so quick assets will decrease which will decrease the ratio.

As of December 31, 2012, Grove Corporation Had a Current