A company sells $200,000 in long-term bonds and buys $200,000 in inventory for cash.Which of the following statements is true?

Question

Quizplus · Accepted Answer

The quick ratio (also known as the acid test ratio) measures a company's ability to meet short-term liabilities with its most liquid assets. Since inventory is not considered a highly liquid asset, the quick ratio will rise when inventory is subtracted from current assets. The times interest earned ratio measures a company's ability to meet its interest obligations with its earnings. Since the company has sold bonds, its interest obligations will increase, but the inventory purchase will not affect earnings. Therefore, the times interest earned ratio will fall.

A Company Sells $200,000 in Long-Term Bonds and Buys $200,000