Desktop Co. presently has a current ratio of 1.2 and an acid-test ratio of 0.8. 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 will decrease the company's cash balance by $50,000, which will decrease the company's current assets and current ratio. However, the prepayment will not affect the company's current liabilities or its ability to meet its short-term obligations, so the acid-test ratio (which excludes inventory from current assets) will only be marginally affected, resulting in a decrease in the acid-test ratio.