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 sold inventory on account. Which of the following statements is incorrect?

Question

Quizplus · Accepted Answer

The sale of inventory on account for an amount in excess of its cost is an asset source transaction; the current asset account Accounts Receivable increases and the revenue account Sales also increases. In addition, the current asset account Inventory decreases and the expense account Cost of Goods Sold increases. The current ratio increases because the numerator increases (by the difference between the selling price and the cost of the inventory sold) while the denominator does not change. Working capital also increases because current assets increase while current liabilities do not. The quick ratio is calculated by dividing quick assets (which include the asset accounts Cash, Accounts Receivable, and Current Marketable Securities) by current liabilities. Since this transaction increases the numerator (that is, the quick asset Accounts Receivable) but does not affect the denominator, it increases (rather than decreases) the quick ratio.

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