Question

Windham Company has current assets of $400,000 and current liabilities of $500,000. Windham Company's current ratio would be increased by

a) The purchase of $100,000 of inventory on account.
b) The payment of $100,000 of accounts payable.
c) The collection of $100,000 of accounts receivable.
d) Refinancing a $100,000 long-term loan with short-term debt.

Answer 1

The collection of $100,000 of accounts receivable would increase Windham Company's current ratio.

Step-by-step explanation:

The current ratio is calculated by dividing current assets by current liabilities. In this case, Windham Company has current assets of $400,000 and current liabilities of $500,000. The current ratio would be increased by:

a) The purchase of $100,000 of inventory on account: This would increase both current assets (inventory) and current liabilities (accounts payable), so it would not change the current ratio.

b) The payment of $100,000 of accounts payable: This would decrease both current assets (cash) and current liabilities (accounts payable), but the current ratio would remain the same.

c) The collection of $100,000 of accounts receivable: This would increase current assets (cash) without affecting current liabilities, so it would increase the current ratio.

Therefore, option c) The collection of $100,000 of accounts receivable would increase Windham Company's current ratio.