Question

The Quick Ratio of a company is 1 : 1. Which of the following transactions will result in increase in Quick Ratio?

• A. Cash received from debtors
• B. Sold goods on credit
• C. Purchased goods on credit
• D. Purchased goods on cash

Hint:

Remember: Anything that increases current liabilities without affecting quick assets positively increases the Quick Ratio.

Answer 1

The Correct Option is C

Quick Ratio (also called Acid Test Ratio) is a measure of a company's short-term liquidity and is calculated as: \[ \text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}} \] Quick assets include cash, marketable securities, and receivables but exclude inventories and prepaid expenses. Let’s analyze each option:

• (A) Cash received from debtors: Cash increases but debtors (another quick asset) decrease by the same amount, so net effect on Quick Assets is zero.
• (B) Sold goods on credit: Inventory decreases, and receivables increase — net quick assets rise only if inventory was not considered. But generally this has no major effect unless margins are unusually high.
• (C) Purchased goods on credit: Inventory (non-quick asset) increases, but Current Liabilities increase (due to creditors). Since numerator stays same and denominator rises, Quick Ratio improves.
• (D) Purchased goods on cash: Cash (quick asset) decreases and inventory (non-quick asset) increases — Quick Assets fall, Quick Ratio worsens.

Therefore, purchasing goods on credit increases Quick Ratio because it raises current liabilities without affecting quick assets.