ExpertHard2 marksMultiple Choice
ACCA · Question 15 · Analyzing Financial Statements
SECTION A
Omega Co has a current ratio of 1.5 and a quick ratio (acid test) of 0.8.
Which of the following transactions would cause the current ratio to increase but the quick ratio to decrease?
SECTION A
Omega Co has a current ratio of 1.5 and a quick ratio (acid test) of 0.8.
Which of the following transactions would cause the current ratio to increase but the quick ratio to decrease?
Answer options:
A.
Paying a trade payable with cash.
B.
Purchasing inventory on credit.
C.
Selling inventory for cash at a profit.
D.
Collecting cash from a trade receivable.
How to approach this question
Use dummy numbers. Let Current Assets (CA) = 150, Current Liabilities (CL) = 100 (CR = 1.5). Let Quick Assets (QA) = 80 (QR = 0.8). Test the transaction 'Paying a trade payable with cash' (e.g., $50). New CA = 100, New CL = 50. New CR = 100/50 = 2.0 (Increased). New QA = 30, New CL = 50. New QR = 30/50 = 0.6 (Decreased).
Full Answer
A.Paying a trade payable with cash.✓ Correct
Paying a trade payable with cash reduces both current assets (cash) and current liabilities (payables) by the same amount. Mathematically, if a fraction is greater than 1 (like the current ratio of 1.5), subtracting the same number from the top and bottom increases the fraction. If a fraction is less than 1 (like the quick ratio of 0.8), subtracting the same number from the top and bottom decreases the fraction.
Common mistakes
Trying to solve this conceptually without using dummy numbers, leading to confusion about the mathematical impact on fractions.
Practice the full ACCA FR — Financial Reporting Practice Exam 1
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