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17 January, 19:04

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.

increase in the cash ratio

decrease in the quick ratio

increase in the current ratio

decrease in the cash coverage ratio

increase in the net working capital to total assets ratio

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Answers (1)
  1. 17 January, 19:47
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    decrease in the quick ratio

    Explanation:

    The quick ratio is the (cash + marketable securities + cash equivalents) divided by the current liabilities. In this question current liabilities are increasing and all other things are constant, which means in relation to the quick ratio the denominator which is current liabilities is increasing and the numerator is constant, this means that the quick ratio will decrease.

    Lets assume that the cash + marketable securities + cash equivalents was 1,000 and current liabilities was 500. In this cash the quick was 1000/500=2

    Now we assume current liabilities increase by 100 and are now 600 where as the numerator is the same.

    1000/600=1.66

    The new quick ratio is 1.66 which is less than 2.
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