Answer (A) is correct . Tosh’s current ratio is 5.29 ($1,480,000 current assets ÷ $280,000 current liabilities), and its quick ratio is 2.14 ($600,000 quick assets ÷ $280,000 current liabilities). Using cash to pay 25% of the accounts payable decreases the numerator and denominator by $40,000 ($160,000 accounts payable × 25%). The new current ratio will be 6.00 ($1,440,000 ÷ $240,000), and the new quick ratio will be 2.33 ($560,000 ÷ $240,000). If a ratio exceeds 1.0, equal decreases in the numerator and denominator increase the ratio.
Answer (B) is incorrect because Given that both ratios initially exceeded 1.0, decreasing cash and accounts payable by equal amounts will increase both ratios.
Answer (C) is incorrect because Given that both ratios initially exceeded 1.0, decreasing cash and accounts payable by equal amounts will increase both ratios.
Answer (D) is incorrect because Given that both ratios initially exceeded 1.0, decreasing cash and accounts payable by equal amounts will increase both ratios.
The company has a normal operating cycle of 6 months.What will happen to the ratios below if Tosh Enterprises uses cash to pay 25% of the accounts payable? What will happen to the ratios below if Tosh Enterprises uses cash to pay 25% of the accounts payable? Current Ratio Quick Ratio
