Question

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

Hint:

When analyzing the effect of a transaction on the Quick Ratio, focus on how Quick Assets (Cash, Debtors, Marketable Securities) and Current Liabilities (short-term debts) are impacted. If Quick Assets increase without a corresponding increase in Current Liabilities, the Quick Ratio will increase.

Answer 1

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.