If a firm uses cash to purchase inventory, its quick ratio will?
Correct answer: B. Decrease
- A. Increase
- B. Decrease
- C. Remain unaffected
- D. Become zero
Explanation
Cash is a quick asset, whereas inventory is excluded from quick assets; exchanging cash for inventory therefore reduces quick assets while leaving current liabilities unchanged. The quick ratio consequently decreases.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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