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.

Explanation:

Quick Ratio Defined
The quick ratio, also known as the acid-test ratio, assesses a company's ability to satisfy immediate debts using its most liquid assets.
The calculation is:

Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities

Option Evaluation
A quick ratio of 1:1 signifies that a company's quick assets (cash, marketable securities, accounts receivable) equal its current liabilities.

(A) Cash received from debtors: This transaction reduces accounts receivable and increases cash. As one liquid asset is exchanged for another, the numerator remains unchanged in aggregate value. If the initial quick ratio was 1, it will remain 1.

(B) Sold goods on credit: This increases Accounts Receivable (a quick asset) and also increases Inventory (not a quick asset). The quick ratio's numerator is impacted positively, but the denominator is unaffected. This scenario results in an increase in the quick ratio, not no change.

(C) Purchased goods on credit: This increases Inventory (not a quick asset) and increases Accounts Payable (a current liability). The quick ratio's denominator increases, while the numerator remains unaffected by this transaction. This results in a decrease in the quick ratio, not no change.

(D) Purchased goods on cash: This transaction reduces cash (a quick asset) and increases Inventory (not a quick asset). The quick ratio's numerator decreases, and the denominator is unaffected. This results in a decrease in the quick ratio, not no change.

Key Insight:A quick ratio generally exceeding 1 is considered favorable, indicating sufficient liquid assets to cover short-term obligations.