Alpha Enterprise has total current assets of $2,000,000 and total current liabilities of $800,000.If the company pays $100,000 of its accounts payable,its current ratio will ________.
A)increase
B)decrease
C)stay the same
D)The answer cannot be determined from the information given.

Question

Quizplus · Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. Thus, the current ratio before paying accounts payable is 2,000,000 / 800,000 = 2.5. After paying accounts payable, the total current assets and current liabilities both decrease by $100,000. Therefore, the current ratio becomes (2,000,000 - 100,000) / (800,000 - 100,000) = 1.9. This means that the current ratio decreases.

Alpha Enterprise Has Total Current Assets of $2,000,000 and Total