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 paid $3,600 on accounts payable.Which of the following statements is incorrect?
A) Gant's quick ratio will increase and its current ratio will decrease.
B) Gant's quick ratio will increase.
C) Gant's working capital will remain the same.
D) Gant's current ratio will increase.

Question

Quizplus · Accepted Answer

Paying off accounts payable reduces current liabilities without affecting current assets (since cash and accounts payable are both current items), which increases the current ratio. The quick ratio, which excludes inventory from current assets, also increases because the reduction in accounts payable (a current liability) improves the ratio of quick assets to current liabilities. Therefore, statement A is incorrect because it suggests the current ratio will decrease, which contradicts the effect of paying off accounts payable.

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