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 sold inventory on account for $6,000.Which of the following statements is not true?
A)Gant's current ratio will decrease.
B)Gant's quick ratio will increase.
C)Gant's working capital will increase.
D)None of these answers is correct.

Question

Quizplus · Accepted Answer

The sale of inventory on account for an amount in excess of its cost is an asset source transaction;the current asset account Accounts Receivable increases by $6,000 and the revenue account Sales also increases.In addition,the current asset account Inventory decreases and the expense account Cost of Goods Sold increases.The quick ratio is calculated by dividing quick assets (which include the asset accounts Cash,Accounts Receivable,and Current Marketable Securities)by current liabilities.Since this transaction increases the numerator (that is,the quick asset Accounts Receivable)but does not affect the denominator,it increases (rather than decreases)the quick ratio.The current ratio is calculated by dividing current assets by current liabilities.Since this transaction increases the numerator (that is,the current asset Accounts Receivable)but does not affect the denominator,it increases the quick ratio.Working capital is calculated by subtracting current liabilities from current assets.Since this transaction increases current assets (that is,the current asset Accounts Receivable)but does not affect current liabilities,it also increases working capital.

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