Ed's Drive-In had $175,000 of current assets and $80,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Ed's Drive-In's current ratio?

The borrowing transaction had a negative effect on Ed's Drive-In's current ratio, as it decreased from 2.1875 to 1.6786. This indicates that the company's ability to pay its short-term obligations has decreased, which may be a cause for concern for its creditors and investors.

Ed's Drive-In's current ratio is a measure of the company's ability to pay its short-term obligations with its current assets. Before the borrowing transaction, the current ratio of Ed's Drive-In can be calculated as follows:
Current Ratio = Current Assets / Current Liabilities
Current Ratio = $175,000 / $80,000
Current Ratio = 2.1875
After the borrowing transaction, Ed's Drive-In has an additional $60,000 in current assets from the bank loan. However, it also has an additional $60,000 in current liabilities from the note payable. Therefore, the new current ratio can be calculated as follows:
Current Ratio = (Current Assets + Borrowed Funds) / (Current Liabilities + Note Payable)
Current Ratio = ($175,000 + $60,000) / ($80,000 + $60,000)
Current Ratio = $235,000 / $140,000
Current Ratio = 1.6786
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