Hi Chris
Interesting question here on current/ acid test.
19.10 SP, a retailer of children's designer wear, makes a gross profit on sales of 25%, pays its suppliers one month after delivery, holds a cash balance equal to half a month's sales and inventory equivalent to one month's sales. There are no other current assets or liabilities. If the inventory was increased to the equivalent of 1. 5 month's sales, what would the immediate effect be?
A The current ratio would increase, the quick ratio would increase
B The current ratio would increase, the quick ratio would decrease
C The current ratio would decrease, the quick ratio would increase
D The current ratio would decrease, the quick ratio would decrease
Soultion.
Ok so I tried to use imaginary numbers to solve this.
Lets say sales = 100
gross profit= 25%*100= 25
cash balance= half the months sales= 50
inventory= one months sales = 100
current test= CA/CL
Then I got stuck because I do not know how to calculate the payable.. or whether my assumptions are correct below! If I was to guess it would have been A- since inventory has increased.
sigh! just when I thought I was ok on this topic. ;-(
Thanks Chris you always a great help as always!
From Abi.