A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the following is correct if they use cash to pay off $50,000 in accounts payable?

1)Current ratio will increase to 5.0.
2)Net working capital will increase to $500,000.
3)Current ratio will decrease.
4) Net working capital will not change.

Well, let's see here. If a firm has $600,000 in current assets and $150,000 in current liabilities, then its current ratio is 4.0 (600,000/150,000).

Now, if they use cash to pay off $50,000 in accounts payable, the current assets will decrease by $50,000 (600,000 - 50,000 = 550,000). However, the current liabilities will also decrease by $50,000 (150,000 - 50,000 = 100,000).

So, the new current ratio would be 5.5 (550,000/100,000) - not exactly 5.0 as mentioned in option 1.

As for option 2, net working capital is calculated by subtracting current liabilities from current assets. In this case, it would be $550,000 - $100,000 = $450,000, not $500,000.

Therefore, options 1 and 2 are incorrect.

Now, option 3 states that the current ratio will decrease. Well, we just established that the current ratio will actually increase. So, option 3 is also incorrect.

Finally, option 4 suggests that net working capital will not change. However, we saw earlier that net working capital will decrease from $500,000 to $450,000. So, option 4 is also incorrect.

In summary, none of the given options are correct. But hey, at least we had a good chuckle while figuring it out, right?

To determine the correct answer, we need to understand the concept of the current ratio and net working capital.

1) Current ratio: This ratio is calculated by dividing current assets by current liabilities, and it measures a company's ability to pay its short-term obligations. A higher current ratio indicates a stronger short-term financial position.

2) Net working capital: It is the difference between current assets and current liabilities and represents the company's ability to meet its short-term financial commitments. A higher net working capital implies stronger liquidity.

Given the firm has $600,000 in current assets and $150,000 in current liabilities, its current ratio can be calculated as follows:
Current Ratio = Current Assets / Current Liabilities
Current Ratio = $600,000 / $150,000
Current Ratio = 4.0

Now, if the firm uses $50,000 in cash to pay off accounts payable (a current liability), the current ratio will change. To determine the new current ratio, we need to adjust both the current assets and current liabilities:

Current Assets (after payment) = $600,000 - $50,000 = $550,000
Current Liabilities (after payment) = $150,000 - $50,000 = $100,000

New Current Ratio = Current Assets (after payment) / Current Liabilities (after payment)
New Current Ratio = $550,000 / $100,000
New Current Ratio = 5.5

Now, let's analyze the options:

1) Current ratio will increase to 5.0.
Incorrect. The new current ratio is 5.5, not 5.0.

2) Net working capital will increase to $500,000.
Incorrect. Net working capital is not directly affected by the payment of accounts payable, so it will not increase to $500,000.

3) Current ratio will decrease.
Incorrect. The current ratio actually increases from 4.0 to 5.5.

4) Net working capital will not change.
Correct. The payment of accounts payable affects current assets and current liabilities equally, so the difference remains the same resulting in no change in net working capital.

Therefore, the correct answer is 4) Net working capital will not change.