Solvent Ltd has a quick ratio of 1.2:1 and its current liabilities amount to $200,000. If it purchased $40,000 of inventory on credit, its quick asset ratio would be:
A) higher.
B) unable to be calculated.
C) unaffected by the transaction.
D) lower.

Question

Quizplus · Accepted Answer

Quick ratio = (Current assets - Inventory) / Current liabilities

Given: Quick ratio = 1.2:1 and Current liabilities = $200,000

Let X be the current quick assets.
Then, Quick assets / Current liabilities = 1.2

X / $200,000 = 1.2
X = 1.2 * $200,000
X = $240,000

Now, if the company purchases $40,000 of inventory on credit, the new quick assets would be:

Quick assets = $240,000 - $40,000
Quick assets = $200,000

New quick ratio = Quick assets / Current liabilities
New quick ratio = $200,000 / $200,000
New quick ratio = 1:1

Therefore, the new quick asset ratio would be lower (Option D).

Solvent Ltd Has a Quick Ratio of 1