Final answer:
Increasing the inventory will raise the firm's current ratio without impacting the quick ratio. This is due to inventory being included in the calculation of the current ratio but excluded from the quick ratio, which focuses on liquid assets.
Step-by-step explanation:
An increase in inventory will increase a firm's current ratio without affecting its quick ratio. The current ratio includes inventory in its calculation, as it represents all current assets that can be converted into cash within a year. In contrast, the quick ratio is calculated excluding inventory, focusing on the most liquid assets only—those that can be quickly converted into cash without losing value.
The increase in inventory is perceived as a less liquid current asset. As such, even though it raises the total value of current assets, it does not impact the quick ratio, which assesses a company’s ability to meet short-term obligations without selling or liquidating inventory. Therefore, a company wanting to improve its current ratio while maintaining its quick ratio might consider increasing its inventory levels, within practical business limits.