A. The early liquidation of a long-term note with cash will reduce the level of current and quick assets, but will not affect the level of current liabilities. Therefore, both the current and quick ratios will decrease as a result of this transaction. However, the degree of the reduction in the quick ratio will be greater than the degree of the reduction in the current ratio because the numerator in the quick ratio smaller. This is because the quick ratio includes only cash, marketable securities and accounts receivable in the numerator. It does not include inventory or other current assets such as prepaids in the numerator. Degree of reduction means percentage of reduction, not an absolute amount of reduction.
B. While both of these ratios will decrease as a result of this transaction, they will not be affected equally. This is because the numerators in the current and quick ratios are different. The numerator in the current ratio includes inventory, but the numerator in the quick ratio does not include inventory.
C. Both the current and the quick ratios will be affected by this transaction because this transaction reduces the current and quick assets used in the calculation of these ratios.
D. While both of these ratios will decrease as a result of this transaction, the current ratio will not be affected by a greater degree than the quick ratio. This is because the numerator in the current and quick ratios are different. The numerator in the current ratio includes inventory, but the numerator in the quick ratio does not include inventory. Therefore, the quick ratio will be affected by a greater degree than the current ratio.
