As of December 31, Year 1, Gant Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, Year 2, Gant recorded the sale of inventory. As a result of this transaction, Gant's quick ratio will:
A)Decrease.
B)Increase.
C)Remain the same.
D)Cannot be determined.

Question

Quizplus · Accepted Answer

The quick ratio will increase because the sale of inventory will convert inventory (a non-quick asset) into cash or accounts receivable (quick assets), thus increasing the numerator of the quick ratio while the denominator (current liabilities) remains unchanged.

As of December 31, Year 1, Gant Corporation Had a Current