A company with $50,000 in current assets,$25,000 in quick assets,and $30,000 in current liabilities makes a payment of a $1,500 current debt.As a result of this transaction,the current ratio and quick ratio will
A) both increase.
B) both decrease.
C) increase and decrease,respectively.
D) remain the same and decrease,respectively.

Question

Quizplus · Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities, so before the payment, the current ratio is 50,000/30,000 = 1.67. After the payment, the current assets will decrease by $1,500, but current liabilities will also decrease by the same amount, so the current ratio will increase. The new current assets will be 50,000 - 1,500 = $48,500, and the new current liabilities will be 30,000 - 1,500 = $28,500. Thus, the new current ratio will be 48,500/28,500 = 1.70.

The quick ratio is calculated by dividing quick assets by current liabilities, so before the payment, the quick ratio is 25,000/30,000 = 0.83. After the payment, the quick assets will not change, but current liabilities will decrease by $1,500, so the quick ratio will increase. The new quick assets will still be $25,000, and the new current liabilities will be $28,500. Thus, the new quick ratio will be 25,000/28,500 = 0.88.

Therefore, the current ratio will increase, and the quick ratio will decrease. The best choice is C.

A Company with $50,000 in Current Assets,$25,000 in Quick Assets,and