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Answer (D) is correct . The current ratio is determined by dividing current assets by current liabilities. The acid test ratio is determined by dividing quick assets by current liabilities. At December 31, Year 1, the current ratio is 6 to 1 [($40,000 + $120,000 + $200,000) ¡Â $60,000]. At December 31, Year 2, the current ratio is 4.3 to 1 [($30,000 + $100,000 + $300,000) ¡Â $100,000]. Hence, there was a decrease in the current ratio. At December 31, Year 1, the acid test ratio is 2.667 to 1 [($40,000 + $120,000) ¡Â $60,000]. At December 31, Year 2, the acid test ratio is 1.3 to 1 [($30,000 + $100,000) ¡Â $100,000]. Thus, the acid test ratio also declined.
Answer (A) is incorrect because Both ratios decreased.
Answer (B) is incorrect because Both ratios decreased.
Answer (C) is incorrect because Both ratios decreased.