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 paid $3,600 on accounts payable.Which of the following statements is not true?
A)Gant's quick ratio will increase and its current ratio will decrease.
B)Gant's quick ratio will increase.
C)Gant's working capital will remain the same.
D)Gant's current ratio will increase.

Question

Quizplus · Accepted Answer

A payment on account is an asset use transaction;the current asset account Cash decreases and the current liability account Accounts Payable also decreases.
The current ratio is calculated by dividing current assets by current liabilities.This transaction impacts both the numerator and denominator.To determine the impact,assume that the current ratio of 1.29 suggests that current assets are $129,000 and current liabilities are $100,000 (that is $129,000 ÷ $100,000 = 1.29);the current ratio would increase as a result of this transaction as follows:
Current ratio = Current assets ÷ Current liabilities
Current ratio = ($129,000 - $3,600)÷ ($100,000 - $3,600)= $125,400 ÷ $96,400 = 1.30.The new current ratio of 1.30 (rounded)is higher than the old current ratio of 1.29.
The quick ratio is calculated by dividing quick assets (which include the asset accounts Cash,Accounts Receivable,and Current Marketable Securities)by current liabilities.This transaction impacts both the numerator and denominator.To determine the impact,assume that the quick ratio of 1.05 suggests that quick assets are $105,000 and current liabilities are $100,000 (that is $105,000 ÷ $100,000 = 1.05);the quick ratio would increase as a result of this transaction as follows:
Quick ratio = Current assets ÷ Current liabilities
Quick ratio = ($105,000 - $3,600)÷ ($100,000 - $3,600)= $101,400 ÷ $96,400 = 1.05.
The new quick ratio of 1.0519 (rounded)is higher than the old quick ratio of 1.05.

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