Oats,Inc.has $14,000 in Cash,$37,000 in Accounts Receivable,$2,500 in Supplies,$52,000 in Accounts Payable and $12,400 in Wages Payable.If Oats uses Cash to pay off $8,000 of the Wages Payable,which of the following statements is correct?

Question

Quizplus · Accepted Answer

Current ratio is calculated by dividing current assets by current liabilities. The current ratio indicates a company's ability to pay off its short-term liabilities with its short-term assets. 
Before the payment of $8,000 wages payable, the current ratio of Oats is:
Current ratio = (Cash + Accounts Receivable + Supplies) / (Accounts Payable + Wages Payable)
= ($14,000 + $37,000 + $2,500) / ($52,000 + $12,400) 
= $53,500 / $64,400 
= 0.83
After the payment of $8,000 wages payable with cash, the current ratio of Oats is:
Current ratio = (Cash + Accounts Receivable + Supplies) / (Accounts Payable + Wages Payable)
= ($6,000 + $37,000 + $2,500) / ($52,000 + $4,400) 
= $45,500 / $56,400 
= 0.81
Therefore, the company's current ratio will decrease.

Oats,Inchas $14,000 in Cash,$37,000 in Accounts Receivable,$2,500 in Supplies,$52,000 in Accounts