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Sweeney Corporation had $250,000 in current assets and $90,000 in current liabilities before borrowing $50,000 from the bank for a 3-month period.
-What effect did the borrowing transaction have on Sweeney's current ratio?
A)The ratio remained unchanged
B)The change in the current ratio cannot be determined
C)The ratio decreased
D)The ratio increased

Question

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Sweeney Corporation had $250,000 in current assets and $90,000 in current liabilities before borrowing $50,000 from the bank for a 3-month period.
-What effect did the borrowing transaction have on Sweeney's current ratio?
A)The ratio remained unchanged
B)The change in the current ratio cannot be determined
C)The ratio decreased
D)The ratio increased

Quizplus · Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities.

Before the borrowing transaction, Sweeney's current ratio was:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $250,000 / $90,000
Current Ratio = 2.78

After borrowing $50,000, Sweeney's current assets would increase to $300,000 ($250,000 + $50,000) and their current liabilities would remain at $90,000.

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $300,000 / $90,000
Current Ratio = 3.33

Therefore, the current ratio increased from 2.78 to 3.33, indicating an improvement in Sweeney's short-term liquidity position. The correct answer is D) The ratio increased.

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