Question

Which of the following transactions will not affect the quick ratio of a company? a. Inventory sold on credit b. Cash purchase of equipment c. Payment for accounts payable d. Accounts receivable collected e. Bank loan repaid

Answer 1

Answer:

Correct answer is C, payment of accounts payable

Explanation:

Quick ration is computed by adding CASH & CASH EQUIVALENTS, SHORT TERM INVESTMENT AND CURRENT RECEIVABLES then divided by CURRENT LIABILITIES.

Payment of accounts payable involves 2 current accounts that is a deduction on cash and a deduction on accounts payable. A deduction on CASH and ACCOUNTS PAYABLE won't affect the quick ratio. See some illustration below.

Quick ratio is 1:1 (Cash + Accounts receivable + short term investments) / (Accounts payable + accrued expenses)

Cash $50

Accounts receivable $60

Short term investment $40

Total quick assets $150

Accounts payable $120

Accrued expenses $30

Total current liabilities $150

A payment of $20 to accounts payable will decrease cash by $20 and accounts payable by $20. Makes the quick assets decreased to $130 and current liabilities to $130. Quick assets will is be 1:1 ($130 / $130)