Question

A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will__________ a. both increaseb. increase and remain the same, respectivelyc. remain the same and decrease, respectivelyd. both decrease

Answer 1

Answer:

Option (b) is correct.

Explanation:

Given that,

Current assets = $70,000

Current liabilities = $50,000

Pays a current liability = $1,000

Current ratio(Prior) :

= Current assets ÷ Current liabilities

= $70,000 ÷ $50,000

= 1.40

Current ratio(After paying liability) :

= (Current assets - $1,000) ÷ (Current liabilities - $1,000)

= ($70,000 - $1,000) ÷ ($50,000 - $1,000)

= $69,000 ÷ $49,000

= 1.41

Therefore, there is an increase in current ratio.

Working capital(Prior):

= Current assets - Current liabilities

= $70,000 - $50,000

= $20,000

Working capital(After paying liability):

= (Current assets - $1,000) - (Current liabilities - $1,000)

= ($70,000 - $1,000) - ($50,000 - $1,000)

= $69,000 - $49,000

= $20,000

Therefore, there is no change in working capital.