FM Chapter 3 Questions – Management of working capital (1)
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How does the both ratio are incerase?
There will be more asset in the current ratio formula, as they sold on credit. Second, there will be more asset and less inventory to deduct from, thus meaning more asset and higher ratio
thanks for the guidance
Thank you the after chapter tests, they help to rewire how i think. I’m grateful
Good
i understand the quick ratio increasing, but why would current ratio increase? since both receivable and inventory make up calculations for current ratio and the credit sales is merely a movement from inventory to receivables
Recievables will be at the selling price, but inventory is recorded at cost (which is lower than the selling price).
Very Helpful Thank you
I understand now, thanks a lot.
The level of inventory does not affect the Quick ratio. So how is it then that a sale of inventory on credit changed both ratios upwards??
If it is sold on credit then receivables will increase (and so the quick ratio will increase).
Sold on credit and also for a profit
it will increase quick ratios as inventories have decreased but the amount of liabilities remained the same.
That is not correct. See my previous reply.
The sell of inventory at a profit means inventory will be reduced only to be replaced with a higher value of debtors…..