Other things held constant, which of the following will not affect the quick ratio? (Assume that...
Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.) and why?
Fixed assets are sold for cash
Cash is used to purchase inventories
cash is used to pay off accounts payable
Accounts receivable are collected
Long-Term debt is issued to payoff a short-term bank loan.
Homework Answers
Answer: The correct option is "accounts receivable are collected".
Quick ratio=(Cash + Accounts Receivables+Marketable
securities)/Current Liabilities
Now, when cash is collected, the value of accounts receivables will
decrease, but cash will increase by same amount. So, the value of
the numerator (Cash + Accounts Receivables) will not change.
Hence, the ratio will not change because the decrease in accounts
receivables will adjust with increase in cash.
Example:
Suppose cash with a company is say $1000 and accounts receivables
is $500
Cash + Accounts Receivables=$1000+$500=$1500
If all the accounts receivables are collected as cash, then the
value of accounts receivables =$500-$500=0
Cash value will be=$1000+$500=$1500
Cash + Accounts Receivables=$1500+$0=$1500
Explanations for the other options:
Fixed assets are sold for cash: Here, cash value will increase and
it will change the quick ratio.
Cash is used to purchase inventories: Here, cash value will
decrease.
Cash is used to pay off accounts payable: Here, cash value will
decrease.
Long-Term debt is issued to payoff a short-term bank loan: When a
short-term bank loan is paid off, the value of current liabilities
will come down and it will change the value of quick ratio.
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