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1) A company sells inventory for cash to a customer at a selling price which is below the cost of the inventory items. How will this transaction affect current ratio and quick ratio immediately after the transaction?
Correct answer is that current ratio will decrease and quick ratio will increase. But please can you explain me? I didn’t understand
2) Sir in investment appraisal time 1 implies “end of first year or start of second year na?”
1. Cash goes up by less than the amount by which inventory falls, because inventory is sold for less than cost. Therefore current assets fall and therefore current ratio falls.
Inventory is not included in the quick ratio and therefore if cash goes up then quick ratio increases.2. Time 1 is end of the first year and start of the second year – there are effectively the same point in time. I explain this in my free lectures.
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