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 $250 for transportation cost on merchandise it had received. Which of the following statements is incorrect?
A) Grove's current ratio will remain the same
B) Grove's quick ratio will increase
C) Grove's working capital will remain the same
D) Grove's quick ratio will increase and its current ratio will remain the same.

Question

Quizplus · Accepted Answer

A payment for transportation costs on merchandise received is an asset exchange transaction; the asset account Cash decreases and the asset account Merchandise Inventory increases. The quick ratio is calculated by dividing quick assets (which include the asset accounts Cash, Accounts Receivable, and Current Marketable Securities) by current liabilities. This transaction decreases the numerator, but has no effect on the denominator. As a result, this transaction causes the quick ratio to decrease (rather than increase).

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