Question:
At December 30, Vida Co. had cash of $200,000, a current ratio of 1.5:1, and a quick ratio of .5:1. On
December 31, all the cash was used to reduce accounts payable. How did this cash payment affect the
ratios?
Answer:
b. Current ratio—increased; Quick ratio—decreased.
Current ratio = Current assets ÷ Current liabilities.
When the current ratio is greater than 1 to 1, an equal decrease in current assets and current liabilities will
result in an increase in the current ratio. The decrease in current liabilities (the smaller number) is
proportionately greater than the decrease in current assets, resulting in an increase in the ratio.
Quick ratio = (Cash + Marketable Securities + Accounts receivable) ÷ Current liabilities When
the quick ratio is less than 1:1, an equal decrease in quickassets and current liabilities will result in a
decrease in the ratio. The decrease in current liabilities (the larger number) is proportionately smaller than
the decrease in quick assets, resulting in a decrease in the ratio.
At December 30, Vida Co. had cash of $200,000, a current ratio of 1.5:1, and a quick ratio of .5:1. On
December 31, all the cash was used to reduce accounts payable. How did this cash payment affect the
ratios?
Answer:
b. Current ratio—increased; Quick ratio—decreased.
Current ratio = Current assets ÷ Current liabilities.
When the current ratio is greater than 1 to 1, an equal decrease in current assets and current liabilities will
result in an increase in the current ratio. The decrease in current liabilities (the smaller number) is
proportionately greater than the decrease in current assets, resulting in an increase in the ratio.
Quick ratio = (Cash + Marketable Securities + Accounts receivable) ÷ Current liabilities When
the quick ratio is less than 1:1, an equal decrease in quickassets and current liabilities will result in a
decrease in the ratio. The decrease in current liabilities (the larger number) is proportionately smaller than
the decrease in quick assets, resulting in a decrease in the ratio.
