Which of the following actions will cause an increase in the quick ratio in the

Question

Which of the following actions will cause an increase in the quick ratio in the short run?
A) $1,000 worth of inventory is sold, and an account receivable is created. The receivable exceeds the inventory by the amount of profit of the sale, which is added to retained earnings.
B) A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash. (Average company profits are 15 percent of assets.)
C) Marketable securities are sold at cost.
D) All of the above.
E) Both the first and second actions listed above will cause an increase in the quick ratio in the short run.

I am leaning towards E....but uncertain. Please help and thank you in advance.

Explanation / Answer

Hey The answer will be E. This is because in both A and B the quick ratio is increasing. Quick Ratio = Quick Assets/Current Liabilities Quick Assets= Current Assets - Inventories Hence, in A, inventory being sold as well as an account receivable being created will lead to an increase in the Quick Assets, leading to an increase in the quick ratio. In B, since a subsidiary is being sold for cash, the only relevant particular concerning the Quick Ratio is the inflow of cash, which will make the Ratio increase. In C, marketable securities being sold will decrease the value of quick assets, hence decreasing the ratio. Hence this is incorrect. D is not possible as C is incorrect. Hence the answer in E, both A & B

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