Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.)
A) Fixed assets are sold for cash.
B) Cash is used to purchase inventories.
C) Cash is used to pay off accounts payable.
D) Accounts receivable are collected.
E) Long-term debt is issued to pay off a short-term bank loan.

Question

Quizplus · Accepted Answer

The quick ratio only includes assets that can be quickly converted to cash, such as cash and accounts receivable, and liabilities that are due in the short-term, such as accounts payable. Collecting accounts receivable will increase cash and therefore increase the quick ratio. Selling fixed assets for cash will also increase the quick ratio if the cash received is used to pay off short-term liabilities. Using cash to purchase inventories or paying off accounts payable will decrease the quick ratio as it reduces the amount of cash available for immediate use. Issuing long-term debt to pay off a short-term bank loan will not affect the quick ratio as it does not involve the current assets and liabilities included in the quick ratio calculation.

Other Things Held Constant, Which of the Following Will Not