Question

Almost Over Inc. has a current ratio of 2:1 for the year 2017. They currently pay cash for all of... Almost Over Inc. has a current ratio of 2:1 for the year 2017. They currently pay cash for all of their purchases of inventory. Almost Over Inc. has decided to purchase inventory on account, payable in 30 days. They currently purchase inventory once per week. The effect of purchasing inventory on account rather than paying immediately in cash will

decrease the current ratio

increase the current ratio

have no effect on the current ratio

cannot be determined without knowing the dollar amount of the inventory purchases

Answer 1

Answer)

My answer is decrease the current ratio.

For example,say for the calculation easiness current assets are $2 and current liabilities are $1.If we purchase goods of $1 by paying cash of $1 then the current assets still remain $2 and hence the ratio is constant.In similar case if goods worth $1 is puchase on credit of $1 the the ratio will be 1.5times [i.e ($2+$1)/($1+$1)].You can substitute that value by any number still your ratio is going to be below 2:1.