A company goes ahead and purchases inventory.The impact on the current ratio is: A)zero,if inventory was purchased using cash. B)positive,if CA CL to start with and inventory is purchased on credit. D)All of the choices are correct.

Question

A company goes ahead and purchases inventory.The impact on the current ratio is:
A)zero,if inventory was purchased using cash.
B)positive,if CA < CL to start with and inventory is purchased on credit.
C)negative,if CA > CL to start with and inventory is purchased on credit.
D)All of the choices are correct.

Quizplus · Accepted Answer

The current ratio is affected by changes in current assets (CA) and current liabilities (CL). Purchasing inventory with cash (a current asset) does not change the total current assets, thus not affecting the current ratio (A). If inventory is purchased on credit when CA < CL, it increases current liabilities without immediately affecting current assets, worsening the current ratio (B). Conversely, if CA > CL and inventory is purchased on credit, it increases both current assets (inventory) and current liabilities (the payable), which can either improve or worsen the current ratio depending on the proportionate increase, but generally, it's seen as a negative impact because it increases liabilities (C). Therefore, all choices correctly describe scenarios that affect the current ratio.

A Company Goes Ahead and Purchases Inventory