[Pass CPA]

Hi,

Could someone explain the below question with a sample JE
Peters Company has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if
A. The company purchased inventory on open account.
B. A previously declared stock dividend were distributed.
C. The company wrote off an uncollectible receivable.
D. The company sold merchandise on open account that earned a normal gross margin.
Answer (D) is correct.
The current ratio is current assets divided by current liabilities. Thus, an increase in current assets or a decrease in current liabilities, by itself, increases the current ratio. The sale of inventory at a profit increases current assets without changing liabilities. Inventory decreases, and receivables increase by a greater amount. Thus, total current assets and the current ratio increase.

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"If you study, you will pass"

[hawkgolf12]

Dr. Accounts Receivable $1,000
Cr. Inventory $750
Dr. COGS $750
Cr. Revenue $1,000

Normal gross margin is referring to earning a profit. Selling inventory at $1,000 that you bought for $750 would cause Current Assets to increase by $250 and Current Liabilities to stay the same, therefore, increasing the Current Ratio above 2.

REG - 81
AUD - 74, 88
BEC - 79
FAR - Sept. '17

REG - 8/9/16
AUD - 9/8/16
FAR - 10/28/16
BEC - TBD

Becker & Ninja MCQ

[Pass CPA]

Thanks a lot hawkgolf12!!

AUD - NINJA in Training
BEC - 86
FAR - NINJA in Training
REG - NINJA in Training

"If you study, you will pass"

[Author]

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