As of December 31, Year 1, Gant Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $29,000. The company uses a perpetual inventory system and sells merchandise for more than it cost.
- On January 1, Year 2, Gant purchased merchandise on account for $4,000. Which of the following statements is correct?
A) Gant's current ratio will decrease.
B) Gant's quick ratio will increase.
C) Gant's working capital will increase.
D) Gant's quick ratio will increase and its current ratio will decrease.

Question

Quizplus · Accepted Answer

A purchase on account increases both current assets (inventory) and current liabilities (accounts payable), but the increase in current liabilities is greater than the increase in current assets. This results in a decrease in the current ratio, which measures the company's ability to meet its short-term obligations with its current assets. A quick ratio decrease can also be expected since inventory is not considered a quick asset. However, working capital is not affected since it is simply the difference between current assets and current liabilities.

As of December 31, Year 1, Gant Corporation Had a Current