Assuming a current ratio of 1.0 and an acid-test ratio of 0.80,how will the borrowing of cash by issuing a six-month note payable affect each ratio?
A)Increase the current ratio and increase the acid-test ratio.
B)No change to the current ratio and increase the acid-test ratio.
C)Decrease the current ratio and decrease the acid-test ratio.

Question

Quizplus · Accepted Answer

Issuing a six-month note payable will increase the current assets (cash) without affecting current liabilities, thus increasing the current ratio. However, since the acid-test ratio only considers the most liquid assets (cash, marketable securities, and receivables), issuing a note payable does not affect the ratio as it does not involve these specific assets. Therefore, the answer is B: No change to the current ratio and increase the acid-test ratio.

Assuming a Current Ratio of 1