What Would Be the Effect on the Current Ratio If

question 4

Multiple Choice

What would be the effect on the current ratio if the company paid $10,000 on its accounts payable?

• A)The current ratio would increase since it is now greater than 1 to 1.
• B)The current ratio would decrease since it is now greater than 1 to 1.
• C)This transaction would have no effect on the current ratio.
• D)The current ratio would change in the same direction whether the ratio were now greater than or less than 1 to 1.

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Definitions:

Inventory

All products and materials that a company holds, aimed at either resale or being incorporated into manufacturing processes.

FOB Shipping Point

A term of sale indicating that the buyer assumes responsibility for shipping costs and risk of loss once the seller has delivered the goods to the shipping carrier.

Sales Discount

A reduction in the price of a product or service offered to customers, typically to prompt early payment or bulk purchases.

Cash Returns

Financial returns or profits that are received in the form of cash, as opposed to stock dividends or other non-liquid forms of return.