The following information is taken from the balance sheet of Menendez Company on January 1, Year 1: On January 1, Year 1 Menendez Company paid $2,000 cash to reduce its accounts payable.
How will this transaction affect the current ratio?
A)It will have no effect on the current ratio.
B)It will cause the current ratio to increase.
C)It will cause the current ratio to decrease.
D)It will potentially affect the current ratio, but the direction of the change cannot be determined without more information.

Question

The following information is taken from the balance sheet of Menendez Company on January 1, Year 1:  On January 1, Year 1 Menendez Company paid $2,000 cash to reduce its accounts payable.
How will this transaction affect the current ratio?
A)It will have no effect on the current ratio. 
B)It will cause the current ratio to increase. 
C)It will cause the current ratio to decrease. 
D)It will potentially affect the current ratio, but the direction of the change cannot be determined without more information.

Quizplus · Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. By reducing accounts payable with $2,000, Menendez Company has lowered its current liabilities, which will increase the current ratio. Thus, the correct answer is (B) - It will cause the current ratio to increase.

The Following Information Is Taken from the Balance Sheet of Menendez