Which of the following actions would NOT affect the quick / liquid ratio of a firm?

Question

BlackTom AI · Accepted Answer

First, recall that the quick ratio is (Current Assets − Inventory) / Current Liabilities. This means inventory is excluded from the numerator, while all other current assets and current liabilities can affect the ratio.
Option a: Purchase inventory on credit. This would increase accounts payable (a current liability) and increase inventory (a current asset). However, inventory is excluded from the quick ratio numerator, while the liability increases, causing the numerator (Current Assets − Inventory) to potentially stay the same or decrease after netting, and the denominator rises. In short, this action tends to lower the quick ratio or leave it unchanged in different circumstances, so it does affect the ratio.
Option b: Sell fixed assets for cash. This converts a non-current asset into cash, boosting current assets (cash) without changing current liabilities. Since cash is included in the quick ratio numerator and liabilities are unchanged, the numerator increases, raising the quick ratio. This action does affect the quick ratio.
Option c: Sell inventory on credit. Inventory (a current asset) is reduced, and accounts receivable (another current asset) is increased by the same amount. The quick ratio’s numerator excludes inventory, but it now gains more in receivables while not counting the inventory left out of the numerator, effectively increasing the numerator. Current liabilities are unchanged, so the quick ratio increases. This action does affect the quick ratio.
Option d: Collect outstanding accounts receivable. This converts one current asset (accounts receivable) into another (cash) with no net change to total current assets and no change to current liabilities. Since both components of the numerator can shift between AR and cash but their sum remains the same, the quick ratio remains unchanged. This action does not affect the quick ratio.

Which of the following actions would NOT affect the quick / liquid ratio of a firm?Single choice

Similar Questions

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