Question

Which of the following statements is CORRECT?

a. If a firm has high current and quick ratios, this always indicate that the firm is managing its liquidity position well.
b. If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.
c. If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline.
d. If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.
e. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.

Answer 1

If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.

Step-by-step explanation:

The correct statement is b. If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.

The current ratio is calculated by dividing current assets by current liabilities, while the quick ratio is calculated by subtracting inventory from current assets and dividing by current liabilities.

Selling inventory for cash and leaving the funds in the bank account would increase the current assets (cash) but not impact the current liabilities. Since the quick ratio excludes inventory, the quick ratio would decline as inventory is no longer included in the calculation.