Solvent Ltd has a quick ratio of 1.2:1 and its current liabilities amount to $200,000. If it purchased $40,000 of inventory on credit, its new quick ratio would be:
A)unable to be calculated.
B)higher.
C)unaffected by the transaction.
D)lower.

Question

Quizplus · Accepted Answer

Quick ratio = (Current assets - Inventory)/Current liabilities
Before the purchase of inventory, the current assets were 1.2 times the current liabilities or:
Current assets = 1.2 x $200,000 = $240,000
If the company purchases $40,000 of inventory on credit, the current assets will increase to $280,000 ($240,000 + $40,000). 
Quick ratio = ($280,000 - $40,000)/$200,000 = 1
Thus, the new quick ratio would be lower than the previous quick ratio. Therefore, the correct answer is option D, lower.

Solvent Ltd Has a Quick Ratio of 1