Golden Fritter Corporation has a current ratio equal to three.If Golden Fritter issues $1,000,000 in long term bonds and uses the proceeds to purchase inventory, what will happen to the current ratio?
A)Increase
B)Decrease
C)Stay the same
D)Change, but more information is required to determine the direction of the change.
E)None of the above.

Question

Quizplus · Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. Since long-term debt is not considered a current liability, the current ratio will decrease when the company issues $1,000,000 in long-term bonds and uses the proceeds to purchase inventory. This is because the company's current assets will increase (due to the inventory purchase) while its current liabilities remain the same, reducing the ratio.

Golden Fritter Corporation Has a Current Ratio Equal to Three