At the end of the month, employees have made the following expenditures from the
ID: 2580240 • Letter: A
Question
At the end of the month, employees have made the following expenditures from the petty cash fund and with company-issued credit cards. None of these transactions has been recorded previously. Supplies (petty cash) = $50 Delivery (petty cash) = $75 Advertising (credit card) = $1,100 Equipment (credit card) = $4,200
Accounting for these employee purchases would include a:
A) Credit to Petty Cash for $125.
B) Credit to Accounts Payable for $5,425.
C) Credit to Cash for $1 ,225.
D) Debit to Accounts Payable for $5,300.
Which of the following would not result in an increase in both the current ratio and the acid-test ratio?
A) Increase in accounts receivable
B) Increase in inventory
C) Increase in cash
D) Increase in current investments
T/F At the time of a credit sale, a company would record an increase in assets and an increase in revenues.
Which of the following would not result in an increase in both the current ratio and the acid-test ratio?
A) Increase in accounts receivable
B) Increase in inventory
C) Increase in cash
D) Increase in current investments
T/F At the time of a credit sale, a company would record an increase in assets and an increase in revenues.
Explanation / Answer
In the question it is asked that which of the given above scenarios would not result in increase in both current ratio and acid test ratio . Let us begin by explanation and differenciating among the two liquidity ratio.
Both the ratio pertains to measure the liquidity of a firm, while current ratio measures the quantitaive relationship between all current assets and all current liabilities.
Current Assets = Current Assets / Current Libilities
Acid Test Ratio or Quick ratio measures the quantitative relationship between highly liquid assets and all current liabilities.
Acid Test Ratio = (Cash + Marketable Securities + Net Receivables) / Current Liabilities
The major difference to note here is, acid test ratio does not include 'inventory'in its calculation because it is not as rapidly convertible to cash and is often sold on credit.
Hence, as per the explanation above, we can conclude that Option B - Increase in inventory would result in increase in current assets but would not affect acid test ratio
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