Which of the following transactions would increase a firm's current ratio?

a. Purchase of inventory on account
B. Payment of accounts payable
c. Collection of accounts receivable
d. Purchase of temporary investment for cash

I chose C collection of accounts receivable because I feel it will increase the increase asset which in turn would increase current ratio. Is my reasoning correct.

Current Ratio = Current Assets / Current Liabilities

Current Ratio will increase IF CA goes up and CL stays the same.

a) Purchase of Inventory on account (CA – no change, CL goes up, so Current Ratio goes down)
b) Payment of AP (CA down, CL down, no change)
c) Collection of AR (CA goes up (cash), and CA goes down (AR), so, no change)
d) Purchase temp invest for cash (CA goes up (invst), CA goes down (cash), no change)

So, none of these transactions will make Current Ratio go up.

Perhaps you mean, which will make Current Ratio go down? In which case it would be A

B, C & D will not affect Current Ratio

As to why it is NOT C….the JE would be Dr. Cash, Cr AR. Current Assets go up by $40 that you collect in cash, but your other Current Assets account – AR goes down by $40, so the net effect is $0, so no change.