Question

During June 2015, Bextra Inc. recorded sales of $55,000 but only $20,000 was collected in cash from customers. Cost of goods sold was $38,000. What was the effect of these sales on Bextra's current ratio?

Answer 1

$\bold{\text{ Current ratio }= \frac{\text{ total assets }}{\text{ existing liabilities}}}$

Now your journal entry to report sales will be based on information provided:

Present debit money 20,000

Debit receivables 35,000  

Credit Sales Revenue 55,000

Journal entry to report selling costs is:

Cost of debit Products Sold 38,000

38,000 stock of Credit Goods  

Based on the information, current assets will rise as 55,000-38,000 will be positive, while current liabilities will remain constant.

When your current assets rise constantly as your current liabilities decrease, your ratio will increase.

Use random numbers to prove this to achieve the present ratio. Thus the current 100,000 assets split by 50,000 would be a ratio of 2:1.

Now increase the total assets to 150,000 separated by existing liabilities by a ratio of 50,000 to 3.1.

Therefore, the current ratio increases as current assets are raised while existing liabilities remain unchanged.