The balance sheet of Mister Ribs Restaurant reports current assets of $36,000 and current liabilities of $18,000. Calculate the current ratio of Mister Ribs Restaurant and determine whether it will increase or decrease as a result of the following transactions. Consider each item, (a) - (d), independent of the others. Paid $4,500 cash for a new oven. Received a $4,500 cash contribution from an investor for the company's common stock. Borrowed $8,280 cash from a bank, issuing a note that must be repaid in three years. Purchased $700 of napkins, paper cups, and other disposable supplies on account.

2

Explanation:

The current ratio is a measure of a company's ability to pay its current liabilities as they mature. It is a liquidity ratio. The formula for calculating the current ratio is current assets divide by current liabilities.

i. e., the current ratio = current assets / current liabilities

For Mr. ribs restaurant.

current ratio = $36,000 / $18000

current ratio = 2

Whether current ration will increase or decrease

a). paid cash $4500 for a new oven

current assets will decrease by $4500. new ratio will 31000/18000

which is 1.75. The oven is not a current asset.

The current ration will decrease

b). Received cash $4,500 as a contribution from an investor

Increases cash but does not affect liabilities since stocks are not debts. new ration $40,500 / $18000 = 2.25.

Increases the current ratio

c). Borrowed $8,280 cash from a bank, issuing a note that must be repaid in three years.

Increased cash by $8250 and current liabilities by $2750 ($ 8,250/3)

New ratio = $44,250/20,750 = 2.13.

Increases current ratio

d) Purchased $700 of napkins, paper cups, and other disposable supplies on account.

Reduces current assets (cash) by $700, disposable napkins, paper cups can not be classified as assets. The action does not affect liabilities since they were paid for in cash. new ratio = $ 35,300 / $18,000 = 1.96:

Reduces current ratio