Assume that a firm issues a six-month note to purchase inventory.Which of the following is true if the current ratio before the purchase is 1.0?
A) the firm's current ratio must decrease
B) the firm's quick ratio will stay the same
C) the firm's current ratio will increase
D) the firm's quick ratio might decrease

Question

Quizplus · Accepted Answer

Issuing a note to purchase inventory will increase the firm's liabilities, which will decrease its quick ratio. However, it will not necessarily affect the current ratio as inventory is considered a current asset and will balance out the increase in liabilities. Therefore, the firm's current ratio may remain the same or increase depending on the amount of inventory purchased and its impact on current assets.

Assume That a Firm Issues a Six-Month Note to Purchase