City Recycling Inc.has $120,000 in current assets and $100,000 in current liabilities.When the company pays $20,000 owed to employees (salaries payable), what effect does this have on their current ratio?

Question

Quizplus · Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Initially, the ratio is $120,000 / $100,000 = 1.2. After paying $20,000, current assets become $100,000 and current liabilities become $80,000, making the new ratio $100,000 / $80,000 = 1.25. Thus, the ratio increases.