The Quick Ratio of a company is $1:1$. Which of the following transactions will result in an increase in the Quick Ratio?
- (A) Cash received from debtors
- (B) Sold goods on credit
- (C) Purchased goods on credit
- (D) Purchased goods on cash
The Quick Ratio of a company is $1:1$. Which of the following transactions will result in an increase in the Quick Ratio?
- (A) Cash received from debtors
- (B) Sold goods on credit
- (C) Purchased goods on credit
- (D) Purchased goods on cash
Show Hint
Solution and Explanation
The correct answer is None of the options.
Here's why:
Understanding Quick Ratio
The quick ratio (also known as the acid-test ratio) is a liquidity ratio that measures a company's ability to meet its short-term obligations with its most liquid assets.
The formula is:
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Analysis of the Options
When the quick ratio is at 1:1, the total of your quick assets (cash, marketable securities, accounts receivable) is equal to your current liabilities.
(A) Cash received from debtors: When cash is received from debtors, there is a decrease in accounts receivable and an increase in cash. This affects the numerator of the quick ratio; one liquid asset is exchanged for another. If the initial quick ratio is 1, the ratio remains 1. Therefore, there is no change.
(B) Sold goods on credit: This will increase Accounts Receivable (a quick asset) and increase Inventory (not a quick asset). Therefore, there is no change in the overall ratio.
(C) Purchased goods on credit: This will increase Inventory (not a quick asset) and increase Accounts Payable (a current liability). Therefore, there is no change in the ratio.
(D) Purchased goods on cash: This will decrease cash (a quick asset) and increase Inventory (not a quick asset). Therefore, there is no change in the ratio.
Important Considerations:The quick ratio should be more than 1 in general, suggesting that the company has enough quick assets to cover its short-term liabilities.
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