Question

Current Ratio is 2: 1 and Quick Ratio is 0.5: 1, a transaction involving decrease in both Current Ratio and Quick Ratio is ______.

Options

• Sale of Non-current Asset for cash.

• Sale of Stock-in-Trade at loss.

• Cash payment of a Current Liability.

• Purchase of Stock-in-Trade on credit.

Answer 1

Current Ratio is 2: 1 and Quick Ratio is 0.5: 1, a transaction involving decrease in both Current Ratio and Quick Ratio is Purchase of Stock-in-Trade on credit.

Explanation:

Purchasing stock on credit increases both Current Assets and Current Liabilities equally. For an initial Current Ratio greater than 1 (2 : 1), an equal increase in both sides causes the ratio to decrease. For the Quick Ratio, because inventory is excluded from Quick Assets, the numerator stays unchanged while Current Liabilities increase, causing the Quick Ratio to decrease as well.