Question

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

a. Issue new common stock and use the proceeds to acquire additional fixed assets.
b. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.
c. Issue new common stock and use the proceeds to increase inventories.
d. Speed up the collection of receivables and use the cash generated to increase inventories.
e. Use some of its cash to purchase additional inventories.

Answer 1

Answer:

b. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.

Explanation:

Quick ratio = cash + short term marketable investment + receivables / current liabilities

To increase the quick ratio, current liabilities have to be reduced and any of the three items in the numerator should be increased.