Question

Quick ratio of a company is 1.5 : 1. State giving reason whether the ratio will improve, decline or not change on payment of dividend by the company.

Answer 1

The Quick Ratio 1.5 : 1 typically decreases when a company pays dividends. Dividend payments lower the company’s current assets, especially cash, which is a fast asset. A lower quick ratio results from a decrease in fast assets since dividends usually affect current liabilities. Quick ratio is derived by dividing quick assets by current liabilities. When quick assets fall but current liabilities remain the same, the ratio decreases. Dividends impair the company’s ability to meet short-term obligations using liquid assets, lowering the quick ratio.