Which of the following transactions will improve the quick ratio?a.Issue of new shares for cashb.Sale of goods for cashc.Sale of goods on creditd.All of these
Question
Which of the following transactions will improve the quick ratio?a.Issue of new shares for cashb.Sale of goods for cashc.Sale of goods on creditd.All of these
Solution
To determine which of the transactions will improve the quick ratio, let's first understand what the quick ratio measures. The quick ratio is a financial metric that assesses a company's ability to pay off its short-term liabilities using its most liquid assets. It is calculated by dividing the sum of cash, cash equivalents, and accounts receivable by the total current liabilities.
Now, let's analyze each transaction and its impact on the quick ratio:
a. Issue of new shares for cash: This transaction does not directly affect the quick ratio since it involves the issuance of new shares, which increases the company's equity. It does not impact the liquidity of the company's assets or liabilities.
b. Sale of goods for cash: This transaction can improve the quick ratio. When goods are sold for cash, it increases the company's cash balance, which is a component of the quick ratio. As a result, the quick ratio may improve if the increase in cash is significant enough to offset any changes in accounts receivable or current liabilities.
c. Sale of goods on credit: This transaction does not directly impact the quick ratio. When goods are sold on credit, it increases accounts receivable, which is a component of the quick ratio. However, since accounts receivable is not considered a highly liquid asset, it does not directly improve the quick ratio.
d. All of these: This option is incorrect. As explained above, only the sale of goods for cash can directly improve the quick ratio.
In conclusion, the transaction that will improve the quick ratio is the sale of goods for cash (option b).
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