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    healthy4lifenow's Avatar
    healthy4lifenow Posts: 1, Reputation: 1
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    #1

    Mar 6, 2007, 01:59 PM
    Mangerial finance
    Using cash to purchase inventories will increase a company's quick ratio and reduce its current ratio?
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #2

    Mar 6, 2007, 11:04 PM
    The answer to your question is NO, it does not.


    EXAMPLE:

    Current Ratio
    = Current Assets / Current Liabilities
    = 100 / 50
    = 2:1

    Quick Ratio
    = (Current Assets-Inventory) / Current Liabilities
    = (100-20) / 50
    = 80 / 50
    = 1.6:1

    JE:
    Dr. Inventory 10
    Cr. Cash 10

    1 CA up, 1 CA down.

    Therefore, CURRENT RATIO STAYS THE SAME.

    Quick Ratio
    = (100-30) / 50
    = 1.4:1

    Therefore quick ratio goes DOWN
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