Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory...
- Assume a company's current ratio and acid-test ratio are less
than 1.0 before it purchases inventory on credit. When it makes the
purchase:
- Its acid-test ratio decreases. B) Its acid-test ratio remains unchanged.
C) Its current ratio decreases. D) Its current ratio remains unchanged.
Please explain your answer. Thank you.
Homework Answers
Answer A) Its acid-test ratio decreases.
Suppose Current Assets are 80000 including 5000 of inventory and Current Liabilities are 100000 before it purchases inventory then
Current Ratio = Current assets / Current Liabilities
= 80000 / 100000
= .80
Quick Ratio = Quick assets / Current Liabilities
= 75000 / 100000
= .75
Suppose company purchases more inventory for 5000 on credit then after purchase of inventory on credit
Current Ratio = Current assets / Current Liabilities
= 85000 / 105000
= .81
Quick Ratio = Quick assets / Current Liabilities
= 70000 / 105000
= .67
Therefore, after purchase of inventory on credit its quick ratio will decrease.
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