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 issued common stock at par value for $10,000 cash.Which of the following statements is correct?
A) Gant's current ratio will decrease.
B) Gant's current ratio will increase.
C) Gant's quick ratio will decrease.
D) Gant's working capital will decrease.

Question

Quizplus · Accepted Answer

The issuance of common stock does not affect the current assets or current liabilities of a company, therefore the current ratio of Gant will remain unchanged. However, the issuance of common stock increases the company's total assets and total equity. As a result, the working capital will increase, and the quick ratio may increase, remain unchanged, or decrease depending on the composition of the current assets. Since both the current ratio and working capital will increase, the correct answer is B.

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