If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash by short-term

Question

debt and collection of accounts receivable have on the ratio?

Short-term Borrowing Collection of Receivable

a. Increase No effect

b. Increase Increase

c. Decrease No effect

d. Decrease Decrease

Answer 1

Acid test ratio = (cash + marketable securities + net receivables) / current liabilities.

In the first scenario, you are going to increase cash and increase current liabilities. It's tricky because it seems like it would no effect as they would cancel each other out, however, that's not the case. You will actually decrease your quick ratio (acid test).

In the second scenario, you will increase cash and decrease your net receivables. Both of these will only affect the numerator of the equation and net each other out, so you will have no effect.

Final answer is C.

Hope this helps.