Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?
A) The transactions will have no effect on the current ratios.
B) The current ratios of both firms will be increased.
C) The current ratios of both firms will be decreased.
D) Only Pepsi Corporation's current ratio will be increased.
E) Only Coke Company's current ratio will be increased.

Question

Quizplus · Accepted Answer

Doubling current liabilities will increase the current assets of both firms, but since Pepsi Corporation's current ratio was lower to begin with, the increase in current assets will have a greater impact on its current ratio compared to Coke Company. As a result, only Pepsi Corporation's current ratio will be increased.

Pepsi Corporation's Current Ratio Is 0