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

Question

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.

查看解析

登录即可查看完整答案

类似问题

At the end of 2012, Delaney Company had a current ratio of 1.87, a quick ratio of 1.31, and working capital of $45,000. Its current assets consisted of cash, accounts receivable, and merchandise inventory. Calculate the amount of Delaney's current liabilities (rounded to 0 decimals):

If a firm buys inventories with cash, the quick ratio decreases, but the current ratio remains constant

_______ ratios measure the ability of an organization to pay its short-term debts.

What do liquidity ratios measure?

Which of the following actions would NOT affect the quick / liquid ratio of a firm?

Which statement is not correct?

Which of the following is not a measure of short-term liquidity?

The current ratio is a measure of:

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单