Beta Limited had a current ratio of 0.8:1 before borrowing $50,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Beta's current ratio?
A) The ratio remained unchanged.
B) The ratio decreased.
C) The ratio increased.
D) Cannot be determined.

Question

Quizplus · Accepted Answer

Borrowing $50,000 increases both current assets (cash) and current liabilities (notes payable), but because the current ratio was below 1 (0.8:1), the proportional increase in current assets has a greater positive impact on the numerator than the increase in current liabilities does on the denominator, thus increasing the current ratio.

Beta Limited Had a Current Ratio of 0