As of December 31,Year 1,Gant Corporation had a current ratio of 1.29,quick ratio of 1.05,and working capital of $18,000.The company uses a perpetual inventory system and sells merchandise for more than it cost.On January 1,Year 2,Gant recorded cost of goods sold of $4,100.As a result of this transaction,Gant's quick ratio will:
A)Decrease.
B)Increase.
C)Remain the same.
D)Cannot be determined.

Question

Quizplus · Accepted Answer

The sale of inventory for an amount in excess of its cost is an asset source transaction;the current asset account Cash (or Accounts Receivable,if on account)increases and the revenue account Sales also increases.In addition,the current asset account Inventory decreases and the expense account Cost of Goods Sold increases.The quick ratio is calculated by dividing quick assets (which include the asset accounts Cash,Accounts Receivable,and Current Marketable Securities)by current liabilities.Since this transaction increases the numerator but does not affect the denominator,it increases the quick ratio.

As of December 31,Year 1,Gant Corporation Had a Current Ratio