What would be the effect of each of the following transactions on each of the following ratios? An example is provided for you.

Example: Collect $10,000 on outstanding accounts receivable.

The current ratio is calculated as current assets divided by current liabilities. Collecting on accounts receivable results in an increase in cash and a decrease in accounts receivable. Both are current asset accounts; therefore, the net effect of the cash collection is zero on the current ratio. The quick (acid-test) ratio is similar to the current ratio except certain current assets are excluded. If you struggle with the accounts, another way to solve the problem is to come up with your own values, plug the values into the ratio equation, and compare the results prior to and subsequent to the activity.

Required: 

On December 30, the company had cash of $300,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, all cash was used to reduce accounts payable.

Transcribed Image Text:

Current ratio Quick ratio Increase, Decrease or No Effect No effect No effect