Use the information on January 1, 2013 to determine the effect of the following entry on the current ratio of Minerva Company: This transaction will
A)have no effect on the current ratio.
B)cause the current ratio to decrease.
C)cause the current ratio to increase.
D)potentially affect the current ratio, but the direction of the change cannot be determined without more information.

Question

Use the information on January 1, 2013 to determine the effect of the following entry on the current ratio of Minerva Company:  This transaction will
A)have no effect on the current ratio. 
B)cause the current ratio to decrease. 
C)cause the current ratio to increase. 
D)potentially affect the current ratio, but the direction of the change cannot be determined without more information.

Quizplus · Accepted Answer

$6,000 current assets/$2,000 current liabilities = 3:1 current ratio before transaction; $6,000 - $1,000 decrease in cash = $5,000 current assets after transaction; $2,000 - $1,000 decrease in accounts payable = $1,000 current liabilities after transaction; $5,000/$1,000 = 5:1 current ratio after transaction

Use the Information on January 1, 2013 to Determine the Effect