As of December 31,Year 1,Gant Corporation had a current ratio of 1.29,quick ratio of 1.05,and working capital of $18,000.The company uses a perpetual inventory system and sells merchandise for more than it cost.On January 1,Year 2,Gant issued common stock at par value for $10,000 cash.Which of the following statement is correct?
A) Gant's current ratio will decrease.
B) Gant's current ratio will increase.
C) Gant's quick ratio will decrease.
D) Gant's working capital will decrease.

Question

Quizplus · Accepted Answer

The issuance of common stock for cash is an asset source transaction;the current asset account Cash increases and the stockholders' equity account Common Stock increases.The current ratio is calculated by dividing current assets by current liabilities.Since this transaction increases the numerator but does not affect the denominator,it increases the current ratio.

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