Marvel Inc. has $180,000 in current assets and $150,000 in current liabilities. When the company pays $35,000 owed to employees (salaries payable), what effect does this have on their current ratio?
A) The ratio increases.
B) The ratio decreases.
C) The ratio stays the same.
D) Cannot be determined.

Question

Quizplus · Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Initially, the ratio is $180,000 / $150,000 = 1.2. After paying $35,000, current assets become $145,000 and current liabilities become $115,000. The new ratio is $145,000 / $115,000 = 1.26, which is an increase.