Question

The Quick Ratio of a company is 2 : 1. Which of the following transactions will result in decrease of this ratio?

Options

• Payment of outstanding salary

• Cash received from debtors

• Sale of goods at a profit

• Purchase of goods for cash

Answer 1

Purchase of goods for cash

Explanation:

The Quick Ratio is calculated by dividing Quick Assets by Current Liabilities. Inventory (goods) is strictly excluded from Quick Assets because it cannot be instantly converted into cash. When a company purchases goods for cash, its cash balance, which is a primary Quick Asset, directly decreases, while its inventory increases. Since the numerator (Quick Assets) decreases and the denominator (Current Liabilities) remains completely unchanged, the overall Quick Ratio declines.