Assuming a current ratio of 1.2 and an acid-test ratio of 0.80,how will the purchase of inventory with cash affect each ratio?
A)Increase the current ratio and increase the acid-test ratio.
B)No change to the current ratio and decrease the acid-test ratio.
C)Decrease the current ratio and decrease the acid-test ratio.

Question

Quizplus · Accepted Answer

Purchasing inventory with cash decreases cash (an asset) but increases inventory (also an asset), leaving total current assets unchanged, thus not affecting the current ratio. However, since cash is a quick asset and inventory is not, this transaction decreases the acid-test (quick) ratio.

Assuming a Current Ratio of 1