This question is from a practice test off one of those websites with all the free stuff… Given that the current ratio is 2.0 times, if we use cash to settle a short term liability, how would this transaction affect the current and quick ratios? Current Ratio Quick Ratio A. Decrease Decrease B. Decrease Remain Unchanged C. Increase Increase D. Increase Remain Unchanged Answer given is D. I understand the Current Ratio part, if it is > 1 and you decrease the numerator and denominator by the same amount, the new ratio will be greater than before, right? About the quick ratio - The example they gave in their explanation did work with the quick ratio but the quick ratio started out as 1.0. The quick ratio remaining unchanged will only be the case if it starts out as 1.0, correct? Also - on the topic of the websites with the free stuf - Is any one else using the tests and stuff from those sites as a source for practice questions?
Current ratio = CA/CL=2/1; A decrease in CA with the same decrease in CL is like saying CA/CL=(2-0.1)/(1-0.1)=2.11 that’s an increase Quick ratio = (CA-Inventory)/CL; if the quick ratio is 1, indeed it remains unchanged. If it is greater than 1, it increases, if it is lower than 1, it decreases. The answer in the test seems incomplete, without knowing where the quick ratio was before.
asayers Wrote: ------------------------------------------------------- > This question is from a practice test off one of > those websites with all the free stuff… > > Given that the current ratio is 2.0 times, if we > use cash to settle a short term liability, how > would this transaction affect the current and > quick ratios? > > Current Ratio Quick Ratio > A. Decrease Decrease > B. Decrease Remain Unchanged > C. Increase Increase > D. Increase Remain Unchanged > > Answer given is D. I understand the Current Ratio > part, if it is > 1 and you decrease the numerator > and denominator by the same amount, the new ratio > will be greater than before, right? About the > quick ratio - The example they gave in their > explanation did work with the quick ratio but the > quick ratio started out as 1.0. The quick ratio > remaining unchanged will only be the case if it > starts out as 1.0, correct? > > Also - on the topic of the websites with the free > stuf - Is any one else using the tests and stuff > from those sites as a source for practice > questions? Ya this question doesnt seem complete. Easy to see either C or D, but w/o knowing the quick ratio at the beg. I dont see how you can solve this correctly
info about initial Quick Ratio is necessary
considering the given data, the answer must be C
No, you can’t assume that. You could have a CR = 2.0, and a QR=0, or QR=1.0, or any QR <2.0.
Thanks all - I figured that was the case. I ran through a made up example after I worked on that question that started out with the CR equal to 2.0 and the QR not equal to 1 and the QR did change when you decreased cash and current liabilities by the same amount. I just wanted to make sure I wasn’t missing something.
How can we say that QR is going to remain same affirmatively without knowing the value of the inventory? QR remain same only when the inventory is Zero. I think given the choices of answer, D is correct. If there was “Increase, Decrease”, that would also be correct. My bad judgement.