Answer (C) is correct . The current ratio equals current assets divided by current liabilities. Thus, an increase in current assets or a decrease in current liabilities, by itself, increases the current ratio. The sale of inventory at a profit increases current assets without changing liabilities. Inventory decreases, and receivables increase by a greater amount. Thus, total current assets and the current ratio increase.
Answer (A) is incorrect because The distribution of a stock dividend affects only stockholders’ equity accounts (debit common stock dividend distributable and credit common stock).
Answer (B) is incorrect because Writing off an uncollectible receivable does not affect total current assets. The allowance account absorbs the bad debt. Thus, the balance of net receivables is unchanged.
Answer (D) is incorrect because The purchase of inventory increases current assets and current liabilities by the same amount. The transaction reduces a current ratio in excess of 1.0 since the numerator and denominator of the ratio increase by the same amount.
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