At the end of 2021, Barker Corporation’s preliminary trial balance indicated a current ratio of 1.3. Management is contemplating paying some of its accounts payable balance before the end of the fiscal year. Determine whether the effect this transaction would increase or decrease the current ratio. Would your answer be the same if the preliminary trial balance indicated a current ratio of 0.8?
Homework Answers
Part 1
Current ratiio = 1.3
Let the current assets be = $1,300
And current liabilities = $1,000
Let us also assume that a current liabilities of $100 is paid.
Current assets after payment of AP = current assets - current liabilities paid
= 1,300 - 100
= $1,200
Current liabilities after payment of AP = current liabilities - current liabilities paid
= 1,000 - 100
= $900
Current ratio (After payment of AP)
= Current assets after payment of AP/Current liabilities after payment of AP
= 1,200/900
= 1.33
Part 2
Current ratiio = 0.8
Let the current assets be = $800
And current liabilities = $1,000
Let us also assume that a current liabilities of $100 is paid.
Current assets after payment of AP = current assets - current liabilities paid
= 800 - 100
= $700
Current liabilities after payment of AP = current liabilities - current liabilities paid
= 1,000 - 100
= $900
Current ratio (After payment of AP)
= Current assets after payment of AP/Current liabilities after payment of AP
= 700/900
= 0.78
| Preliminary trial balance current ratio of 1.3, a payoff AP would be | Increase | the current ratio. |
| Preliminary trial balance current ratio of 0.8, a payoff AP would be | Decrease | the current ratio. |
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