Use the information on January 1,Year 1 to determine the effect of the following entry on the current ratio of Menendez Company:

How will this transaction affect the current ratio?
A)It have no effect on the current ratio.
B)It will cause the current ratio to increase.
C)It will cause the current ratio to decrease.
D)It will potentially affect the current ratio,but the direction of the change cannot be determined without more information.

Question

Use the information on January 1,Year 1 to determine the effect of the following entry on the current ratio of Menendez Company:

How will this transaction affect the current ratio?
A)It have no effect on the current ratio. 
B)It will cause the current ratio to increase. 
C)It will cause the current ratio to decrease. 
D)It will potentially affect the current ratio,but the direction of the change cannot be determined without more information.

Quizplus · Accepted Answer

Current ratio = Current assets ÷ Current liabilities
Before transaction: Current ratio = $12,000 ÷ $4,000 = 3 to 1
After transaction: Current ratio = ($12,000 -$2,000)÷ ($4,000 - $2,000)= 5 to 1

Use the Information on January 1,Year 1 to Determine the Effect