Fullerton Co.has the following information from its accounting records: If Fullerton uses cash of $10,000 to pay a current liability,its:
A)current ratio increases and its debt-to-assets ratio increases.
B)current ratio increases and its debt-to-assets ratio decreases.
C)current ratio decreases and its debt-to-assets ratio increases.
D)current ratio decreases and its debt-to-assets ratio decreases.

Question

Fullerton Co.has the following information from its accounting records:  If Fullerton uses cash of $10,000 to pay a current liability,its:
A)current ratio increases and its debt-to-assets ratio increases. 
B)current ratio increases and its debt-to-assets ratio decreases. 
C)current ratio decreases and its debt-to-assets ratio increases. 
D)current ratio decreases and its debt-to-assets ratio decreases.

Quizplus · Accepted Answer

Using cash to pay a current liability decreases the current liabilities, which increases the current ratio. As a result, the debt-to-assets ratio decreases as well since the assets remain the same.