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A- increase current ratio B- no change in current ratio C- decrease current ratio D- decrease working capital
A- The right answer is that increase current ratio
Because when we purchase goods on credit base the entry will be :
Purchase Account Dr
By Account / Part Name Cr
On the other hand the justification according to accounting rules is that
When we purchase goods on cash / credit base then automatically increase in inventory / in asset . inventory also considered the current asset and purchase on credit base is increase in liability So we considered to accounts payable as current liability. Increase / change in current assets and liabilities is same affect.
credit purchase goods do not change in current ratio because increase of current assets (inventory) and increase of current Liabilities (Accounts Payable) to be same.
as it will be paid through the year i will recorded as current liabilities , this will cause to decrease working capital ( current assets - current liabilities )
answer is D
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