Desktop Co.presently has a current ratio of 1.2 to 1 and an acid-test ratio of 0.8 to 1.Prepaying next year's office rent of $50,000 will:
A) have no effect on either the company's current ratio or its acid-test ratio.
B) have no effect on the company's current ratio but will decrease its acid-test ratio.
C) decrease the company's current ratio and decrease its acid-test ratio.
D) increase the company's current ratio and increase its acid-test ratio.

Question

Quizplus · Accepted Answer

Prepaying next year's office rent of $50,000 will not affect the company's current ratio because both current assets and current liabilities will decrease by the same amount. However, it will decrease the company's acid-test ratio because the payment of rent is not considered a liquid asset, and it will decrease the numerator of the ratio while not affecting the denominator.