Question

Assuming a current ratio of 1.00 and an acid test ratio of .75 how will the purcahse inventory with cash affect each ratio

Answer 1

The current ratio will remain the same as 1 only

The acid-test ratio will decrease.

• The current ratio will stay the same because there won't be a change in current liabilities, and the change in current assets won't have any net consequences because the asset will grow due to an increase in inventory, but it will also decrease by the same amount due to a decrease in cash, so the current ratio will stay the same.

• The acid-test ratio will decline since the numerator will shrink owing to a cash shortage, and the growth in inventory won't be taken into account because current assets aren't included in this ratio.

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