Question

Bicksler Corporation has a current ratio of 2.0 on 21st July. On 22nd July, Bicksler purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio of Bicksler?

A. The current ratio will decrease.
B. The quick ratio will become more than its current ratio.​
C. ​The current ratio will become equal to its quick ratio.
D. ​The current ratio will increase.
E. The current ratio will remain the same.

Answer 1

Answer:

E. The current ratio will remain the same.

Explanation:

Current Ratio = Current Asset (CA) / Current Liabilities (CL)

Considering both, raw materials and credit from supplier, as current asset and liability, the current ratio will remain the same. This is because in the formula, both dividend and divisor will increase in the same amount, therefore the ratio will remain the same.

Quick Ratio = (Current Asset (CA) – Inventory (I) – Prepaid Expenses (PE))/Current Liabilities (CL)

Instead, the quick ratio will decrease. This is because, in the formula, the dividend will decrease and divisor will increase, therefore the ratio will decrease.