A company borrows $10,000 and puts the money into its checking account.This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was
A) equal to one.
B) greater than one.
C) less than one.
D) greater than or less than one, but not equal to one.

Question

Quizplus · Accepted Answer

The current ratio is calculated by dividing the current assets by the current liabilities. If the company borrows $10,000 and puts it into the checking account, the current assets will increase by $10,000 but the current liabilities will remain the same. Therefore, the current ratio will increase only if the ratio was less than one before the transaction. If the ratio was already equal to or greater than one, adding $10,000 to current assets will not change the ratio.

A Company Borrows $10,000 and Puts the Money into Its