Final answer:
Paying off short-term debt would normally increase Heath Co.'s current ratio because it reduces current liabilities without affecting current assets, thus increasing the ratio.
Step-by-step explanation:
The question relates to the concept of the current ratio, which is a measure used in finance to assess a company's ability to pay off its short-term obligations with its short-term assets. The current ratio is calculated by dividing current assets by current liabilities. Heath Co.'s current ratio is 4:1, meaning that for every dollar of current liabilities, the company has four dollars of current assets.
Examining the provided options:
- Purchasing inventory on credit - This would increase both current assets and current liabilities, likely leaving the current ratio unchanged.
- Paying off short-term debt - This would reduce current liabilities without affecting current assets, which would normally increase the current ratio.
- Collecting accounts receivable - This would increase current assets without increasing current liabilities, thus potentially increasing the current ratio.
- Borrowing long-term debt - This would not affect the current ratio, as long-term debt is not considered a current liability.
Among the options listed, paying off short-term debt would normally increase the current ratio of Heath Co. because it reduces the denominator (current liabilities) of the ratio without lowering the numerator (current assets).