A firm wants to strengthen its financial position. Which of the following action

Question

A firm wants to strengthen its financial position. Which of the following actions would INCREASE its quick ratio?
a) Offer price reductions along with generous credit terms that would enable the firm to sell some of its excess inventory and lead to an increase in accounts receivable.
b) Issue new common stock and use the proceeds to increase inventories.
c) Speed up the collection of receivables and use the cash generated to increase inventories.
d) Use some of its cash to purchase additional inventories.
e) Issue new common stock and use the proceeds to acquire additional fixed assets.

Explanation / Answer

We know that Quick ratio = (Current assets - Inventories)/Current liabilities If a firm wants to increase its quick ratio, it has to reduce its inventories. The higher the amount in inventory, the lower will be its quick ratio. If we consider the option a) If the firm sells its excess inventory and increase its accounts receivables then it will increase its quick ratio. Because accounts receivable is a current asset, increase in current assets will increase the quick ratio. Since fixed assets are not involved in the computation of quick ratio, option (e) is ignored.

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