Assume that a company's current ratio is 2.0. If the company purchases inventory on credit, which of the following is true?
A)The current ratio will increase.
B)The current ratio will decrease.
C)There will be no net impact on the current ratio.
D)The current ratio will change, but there will be no effect on the quick ratio.

Question

Quizplus · Accepted Answer

When the company purchases inventory on credit, its current assets will increase, but so will its current liabilities (accounts payable). This will lead to an increase in the denominator of the current ratio, causing the ratio to decrease.

Assume That a Company's Current Ratio Is 2