Question 1

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?

Accepted Answer

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).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Trying to solve this conceptually without using dummy numbers, leading to confusion about the mathematical impact on fractions.

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?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 1

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