The tollowing information is taken from the balance sheet of Menendez Company on

Question

The tollowing information is taken from the balance sheet of Menendez Company on January 1, 2016: Current Assets Equipment Land 12,000 Current Liabilities 4,000 32,000 64,000 52,000Long-term Liabilities 36,000 Common Stock Total Assets 100,000 Total Liab. & Equity S 100,000 19 Oamuary 22016 peor Accounts receivable 8,000 Service revenue 8,000 Recording this transaction will: A. decrease the current ratio to 1:1 B. increase the current ratio to 3: C. increase the current ratio to 5:1 D. have no effect on the current ratio

Explanation / Answer

Present current ratio = Current assets/current liabilities = 12000/4000 = 3:1

Proposed current ratio = Current ratio /current liabilities = (12000+8000)/4000 = 5:1

so answer is c) increase the current ratio to 5:1

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