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 purchased merchandise on account for $4,000.Which of the following statements is correct?
A) Gant's current ratio will decrease.
B) Gant's quick ratio will increase.
C) Gant's working capital will increase.
D) Gant's quick ratio will increase and its current ratio will decrease.

Question

Quizplus · Accepted Answer

The purchase of merchandise on account for $4,000 will increase the current liabilities of Gant Corporation, thus decreasing its current ratio. The quick ratio, which only considers the most liquid assets, will not be affected as the purchase was made on account and not with cash or other liquid assets. The working capital will also not be affected significantly since the increase in current assets (due to the purchase) is offset by the increase in current liabilities, resulting in a small net increase or no change. Therefore, only choice A is correct.

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