Question
Which among the following ratios will be affected
because of salaries paid in cash as advance salary?Solution
Salary paid in advance is a prepaid expense. Its impact on current assets will be that cash will go down and Prepaid Assets will go up, therefore not effecting the total Current Assets. As such, the current ratio will not be impacted as no change in current assets due to this transaction. Debt Equity will also not be impacted as it does not take into account the current assets. Quick ratio, takes into account current assets less any inventory or prepaid assets. As such, the quick ratio will be impacted by this transaction.
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