Ed's Drive-In had $175,000 of current assets and $80,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable.What effect did the borrowing transaction have on Ed's Drive-In's current ratio?

Question

Quizplus · Accepted Answer

Current ratio is given by dividing current assets by current liabilities.

Before borrowing:
Current ratio = 175,000/80,000 = 2.1875

After borrowing:
Current assets = 175,000 + 60,000 = 235,000 
Current liabilities = 80,000 + 60,000 = 140,000

New current ratio = 235,000/140,000 = 1.6785

The ratio decreased, indicating a weaker liquidity position for Ed's Drive-In.

Ed's Drive-In Had $175,000 of Current Assets and $80,000 of Current