Swanson Company had $250,000 of current assets and $90,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable.What effect did the borrowing transaction have on Swanson Company's current ratio?
A) The ratio remained unchanged.
B) The change in the current ratio cannot be determined.
C) The ratio decreased.
D) The ratio increased.

Question

Quizplus · Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. Before borrowing, Swanson Company's current ratio was:

Current ratio = Current assets / Current liabilities
Current ratio = $250,000 / $90,000
Current ratio = 2.78

After borrowing the $60,000, the current ratio becomes:

Current ratio = (Current assets + Borrowed funds) / Current liabilities
Current ratio = ($250,000 + $60,000) / $90,000
Current ratio = 3.22

Therefore, the borrowing transaction causes the current ratio to decrease from 2.78 to 3.22.

Swanson Company Had $250,000 of Current Assets and $90,000 of Current