Assume a company's liquidity ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase:

a) Its current ratio decreases.

b) Its quick ratio remains unchanged.

c) Its quick ratio decreases.

d) Its current ratio remains unchanged.

Question

Nikhil Bauer

Business

23 October, 22:06

Assume a company's liquidity ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase:

a) Its current ratio decreases.

b) Its quick ratio remains unchanged.

c) Its quick ratio decreases.

d) Its current ratio remains unchanged.

+4

Answers (1)

Know the Answer?

Mona · Answer 1

Answer: Option C

Explanation: Quick ratio is calculated by dividing those assets which can be readily converted into cash by the current liabilities of a company. Inventory is not a quick assets as it takes time to sale the inventory.

Thus, when inventory will be purchased the numerator of he ratio will remain unchanged but due to credit purchase denominator will be increased leading to lower ratio.

Hence the correct option is C.

Assume a company's liquidity ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase:a) Its current ratio decreases.b) Its quick ratio remains unchanged.c) Its quick ratio decreases.d) Its current ratio remains unchanged.

Assume a company's liquidity ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase:

a) Its current ratio decreases.

b) Its quick ratio remains unchanged.

c) Its quick ratio decreases.

d) Its current ratio remains unchanged.