All other things beings equal, and assuming all ratios have positive values, an increase in current liabilities will:

Question

BlackTom AI · Accepted Answer

Question restatement: All other things being equal, and assuming all ratios have positive values, an increase in current liabilities will:

Option analysis:

- The sole option provided is: 'decrease the quick ratio.'

Step-by-step reasoning:
- The quick ratio is calculated as (current assets - inventories) / current liabilities. It measures a company's ability to meet short-term obligations with its most liquid assets.
- If current liabilities increase while current assets (and inventories) remain unchanged, the denominator of the quick ratio grows while the numerator stays the same, causing the overall ratio to decline. This means liquidity as captured by the quick ratio worsens.
- The stipulation that all ratios are positive does not alter this relationship; a higher current liability figure would still reduce the quotient, provided assets stay constant.

Contextual considerations:
- If inventories or other components of current assets were to change alongside liabilities, the effect on the quick ratio could be different. However, the question explicitly states all else is equal, meaning those other variables remain constant for this analysis.
- The quick ratio is more conservative than the current ratio because inventories are excluded from current assets in the numerator; therefore, changes in current liabilities have a direct and straightforward impact on it as described above.

Why this option makes sense compared to potential alternatives (conceptually):
- If current liabilities increase and current assets are unchanged, the quick ratio must fall, because you have more obligations to cover with the same amount of liquid assets.
- If an alternative option suggested that the quick ratio would increase or stay the same under the same conditions, that would be inconsistent with the ratio’s mathematical structure and the assumption of constant current assets.

In summary, given the definition of the quick ratio and the condition that all else remains constant with positive values, an increase in current liabilities leads to a decrease in the quick ratio.

FA25-BL-BUS-F307-1134

All other things beings equal, and assuming all ratios have positive values, an increase in current liabilities will:

View Explanation

Log in for full answers

Similar Questions

A family runs a large farm in South Australia. Here is the quick ratio for the prior year and the current year. Based on this ratio, evaluate the financial situation of the business. Prior year Current year 1.1 0.7

What does the Quick Asset Ratio exclude from the numerator?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler