An entity purchased a new machine for US $’ III 610100 by borrowing the required funds from a bank for 180 days. What will be the direct impact of this transaction?
A. Decrease the current ratio and decrease the debt ratio.
B. Increase the current ratio and increase the debt ratio.
C. Increase the current ratio and decrease the debt ratio.
D. Decrease the current ratio and increase the debt ratio.
Answer:D
An entity purchased a new machine for US $’ III 610100 by borrowing the required funds from a bank for 180 days. What will be the direct impact of this transaction?
A. Decrease the current ratio and decrease the debt ratio. B. Increase the current ratio and increase the debt ratio. C. Increase the current ratio and decrease the debt ratio. D. Decrease the current ratio and increase the debt ratio.
Explanation: The borrowing of funds for 180 days constitutes short-term borrowing. The new machine is a fixed asset. Current liabilities have increased, and current assets have remained constant. Consequently, the current ratio current assets + current liabilities) has decreased. Total debt and total assets increased by the same absolute amount, and the debt ratio total debt – total assets) should have increased. assuming total debt is less than total asset.