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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