A firm has $600,000 in current assets and $150,000 in current liabilities.Which of the following is correct if it uses cash to pay off $50,000 in accounts payable?
A)current ratio will increase to 5.0.
B)net working capital will increase to $500,000.
C)current ratio will decrease.
D)net working capital will not change.

Question

Quizplus · Accepted Answer

Net working capital is calculated by subtracting current liabilities from current assets. Therefore, if the firm uses cash to pay off $50,000 in accounts payable, both current assets and current liabilities will decrease by $50,000, leaving net working capital unchanged at $450,000. The current ratio (current assets/current liabilities) will also decrease from 4.0 to 3.5, so option C is incorrect. Option A is incorrect because the current ratio is decreasing, not increasing, and Option B is incorrect as net working capital does not change.

A Firm Has $600,000 in Current Assets and $150,000 in Current