Assuming a current ratio of 1.0 and an acid-test ratio of 0.75,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 the current ratio remains the same. However, since inventory is not considered in the acid-test (quick) ratio, reducing cash decreases the numerator of the acid-test ratio without affecting the denominator, leading to a decrease in the acid-test ratio.

Assuming a Current Ratio of 1