Question7 A Ltd wrote off $ 10,000 of obsolete inventory at December 31, 20X0.The effect of this write-off was to decrease: Only the quick ratio. Only the current ratio. Both the current and quick ratios. Neither the current nor the quick ratios. None of the options are correct ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

To analyze the impact of a write-off of obsolete inventory, start by identifying what each ratio measures and what changes in the balance sheet occur.
Option 1: 'Only the quick ratio.' This is unlikely because the quick ratio excludes inventory from current assets, so reducing inventory does not affect the numerator of the quick ratio. Therefore this option is incorrect.
Option 2: 'Only the current ratio.' The current ratio = current assets / current liabilities. A write-off reduces inventory, which is part of current assets. Since current liabilities are unchanged, the denominator stays the same while the numerator decreases, so the current ratio decreases. This option is plausible.
Option 3: 'Both the current and quick ratios.' Since the quick ratio excludes inventory from current assets, a write-off of inventory reduces current assets but does not reduce the quick assets in the numerator. Therefore the quick ratio should remain unchanged, making this option incorrect.
Option 4: 'Neither the current nor the quick ratios.' As explained, the current ratio would decline due to a lower current asset base, so this option is incorrect.
Option 5: 'None of the options are correct.' Given that option 2 accurately describes the effect on the current ratio, this option is incorrect.
Putting it together, the write-off reduces current assets (due to the lower inventory value) while current liabilities are unchanged, causing the current ratio to fall, whereas the quick ratio remains unaffected because inventory is excluded from its calculation. Thus, the statement that matches the outcome is that only the current ratio decreases.

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