Assuming an acid-test ratio of 1.0,how will the purchase of inventory with cash affect the ratio?
A)Increase the acid-test ratio.
B)No change to the acid-test ratio.
C)Decrease the acid-test ratio.
D)Could either increase or decrease the acid-test ratio.

Question

Quizplus · Accepted Answer

The acid-test ratio is calculated by dividing quick assets (cash, marketable securities, and accounts receivable) by current liabilities. The ratio assumes that inventory cannot be easily and quickly converted into cash, which is why it is excluded from quick assets. Therefore, the purchase of inventory with cash will decrease the amount of quick assets and the ratio itself, leading to a lower acid-test ratio.

Assuming an Acid-Test Ratio of 1