Answer (C) is correct . The current ratio is computed by dividing current assets by current liabilities. It is the most commonly used measure of liquidity. A ratio can be increased by either raising the numerator, lowering the denominator, or both. Selling merchandise on account at a profit increases the current ratio because accounts receivable increase by more than inventory decreases; thus, the total of current assets increases.
Answer (A) is incorrect because The distribution of a stock dividend affects stockholders’ equity accounts only, not current assets and liabilities.
Answer (B) is incorrect because Writing off an uncollectible receivable decreases the accounts receivable account and the related allowance for bad debts by equal amounts; therefore, net receivables does not change.
Answer (D) is incorrect because Purchasing inventory on credit increases both current assets and current liabilities by an equal amount. The effect is to decrease a current ratio that is greater than 1.0.
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