During the year,Dempsey Corporation's current ratio increased while its quick ratio decreased.Which of the following could help explain this situation?
A) The sale of short-term investments during the year
B) A decrease in accounts receivable during the year
C) An increase in accounts payable during the year
D) An increase in inventory levels during the year

Question

Quizplus · Accepted Answer

An increase in inventory levels during the year would increase the current ratio because inventory is included in the current assets and the denominator of the ratio. However, it would decrease the quick ratio because inventory is not considered a quick asset (i.e. it takes time to sell and convert to cash). Therefore, an increase in inventory explains the increase in current ratio and the decrease in quick ratio. The other choices are unlikely to have a significant impact on the ratios.

During the Year,Dempsey Corporation's Current Ratio Increased While Its Quick