On January 1, 20X1, Hawkeye Inc. paid a supplier $3,000 for a previous purchase and delivery...
- On January 1, 20X1, Hawkeye Inc. paid a supplier $3,000 for a previous purchase and delivery of inventory. The inventory had not been paid for, and the payment on January 1 reduced the amount Hawkeye Corp. owed to the supplier (accounts payable) by the payment amount. Would this transaction increase, decrease, or have no effect on the current ratio of Hawkeye Inc., which was equal to 1.25 before the transaction (2 points)? Explain your answer in terms of numerator and denominator effects (2 points).
Homework Answers
Answer:
(1) This transaction increase the current ratio of Hawkeye Incorporation
Explanation :
Current ratio = Current assets/Current liabilities
Current ratio measures the liquidity of company
In this case current ratio is 1.25:1 it means there are $1.25 of current assets to meet the short term obligations of $1
Higher the current ratio reflects the good liquidity position of company and vice-versa.
(2)In this case current liabilities is reduced by $ 3,000, due to payment made of previous purchase.
Denominator is reduced by $3,000, Hence the current ratio will be increased.
Thank you :)
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