The following information concerning the current assets and current liabilities of
Mason Company at December 31, 2017, is presented below.
$\begin{array}{lrr}
\text { Current Assets }\
\text { Cash } & & \$ 6,700 \
\text { Accounts Receivable } & \$ 7,900 & \
\text { Less Allowance } & \underline{ (70) }& 7,830 \
\text { Inventory } & & 2,270 \
\text { Prepaid expenses } & & \underline{500} \
\text { Total }& & \underline{\$17,300}\
\
\text { Current Liabilities }\
\text { Accounts payable } && \$ 9,000 \
\text { Wages payable } && 500 \
\text { Taxes payable } & &200 \
\text { Rent payable } & &1,600 \
\text { Notes payable } &&\underline{ 2,000} \
\text { Total } &&\underline{ \$ 13,300}
\end{array}$
Based on this information, how would the quick ratio be affected if Mason purchased $1,300 of inventory on account?
A)The quick ratio would decrease from 1.30 to 1.21.
B)The quick ratio would not change.
C)The quick ratio would decrease from 1.09 to 1.00.
D)The quick ratio would decrease from 1.09 to 1.21.

Question

Quizplus · Accepted Answer

The quick ratio is calculated as (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities. Initially, it is (6,700 + 7,830) / 13,300 = 1.09. After purchasing $1,300 of inventory on account, current liabilities increase to $14,600, and the quick ratio becomes (6,700 + 7,830) / 14,600 = 1.00.

The Following Information Concerning the Current Assets and Current Liabilities