The quick ratio is the total of cash, marketable securities, and net accounts receivable divided by total current liabilities. If a payment of $100,000 cash is used to purchase inventory, the numerator of the ratio will change while the denominator remains the same. That will change the quick ratio.
The current ratio is total current assets divided by total current liabilities. Currently, the current ratio is $2,600,000 ÷ $1,300,000, which is 2.0. When a payment of $100,000 cash is used to pay $100,000 of accounts payable, both cash (a current asset) and accounts payable (a current liability) will decrease by $100,000. Current assets will become $2,500,000 and current liabilities will become $1,200,000. The current ratio will become $2,500,000 ÷ $1,200,000, which is 2.083. Therefore, the current ratio will increase, not decrease.
The current ratio is total current assets divided by total current liabilities. When a payment of $100,000 cash is used to pay $100,000 of accounts payable, both cash (a current asset) and accounts payable (a current liability) will decrease by $100,000. Since the beginning values of total current assets and total current liabilities are different, the same amount of decrease to both will change the ratio between them.
The quick ratio is the total of cash, marketable securities, and net accounts receivable divided by total current liabilities. If a payment of $100,000 cash is used to purchase inventory, the numerator of the ratio will decrease while the denominator remains the same. As a result, the quick ratio will decrease.
|
If Birch's current liabilities are $1,300,000, the firm's