A company bought inventory for cash.Which of the following statements about their current ratio and quick ratio is true?
A)Both ratios would increase.
B)The current ratio would not change, but the quick ratio would decrease.
C)The current ratio would not change, but the quick ratio would increase.
D)Both ratios would decrease.

Question

Quizplus · Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Since the purchase of inventory was made with cash, it does not affect current assets or current liabilities, therefore the current ratio would not change.
The quick ratio is calculated as (current assets - inventory) divided by current liabilities. Since the purchase of inventory was made with cash, it increases the inventory and therefore decreases the numerator of the quick ratio. This means that the quick ratio would decrease.

A Company Bought Inventory for Cash