In May,Fish Nets,Inc.sold 8,000 nets with a three-month warranty for $10 each on account.Fish Nets estimates that warranty costs will be approximately $100 on these sales.What effect will the warranty adjusting entry have on Fish Nets' current ratio?
A)It will cause the current ratio to increase.
B)It will cause the current ratio to decrease.
C)It will have no effect on the current ratio because the entry will cause the current assets to increase by $100 and the current liabilities to decrease by $100.
D)It will have no effect on the current ratio because no adjusting entry is made for estimated warranty costs.

Question

Quizplus · Accepted Answer

The warranty adjusting entry will increase Fish Nets' current liabilities by $100 (since they will have to honor warranty claims) without affecting their current assets. This decrease in current ratio will reflect a potential strain on the company's ability to meet its current obligations.