The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.This action had no effect on the company's total assets or operating income.Which of the following effects would occur as a result of this action?
A) The company's debt ratio increased.
B) The company's current ratio increased.
C) The company's times interest earned ratio decreased.
D) The company's basic earning power ratio increased.
E) The company's equity multiplier increased.

Question

Quizplus · Accepted Answer

Since the company used the proceeds from the new stock issuance to pay off short-term notes payable, there is no change in total assets. However, current liabilities would decrease, causing the current ratio (current assets divided by current liabilities) to increase. The other ratios listed would not be affected.

The Cavendish Company Recently Issued New Common Stock and Used