Question

The acid-test ratio of a firm would be unaffected by which of the following? Additional inventory...

The acid-test ratio of a firm would be unaffected by which of the following?

Additional inventory is purchased for cash.

Large accounts receivable balances are collected.

Equipment is purchased, financed by a long-term debt issue.

Several short-term loans are consolidated and paid off using long-term debt
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Answer #1

Answer - several short term loans are considered and paid off using long term debt.

Reason -

Acid test ratio = cash & cash equivalents + marketable securities + account receivable / current liabilities.

Any transaction which effects both numerator and denominator equally in same way ( increase/decrease in both sides) in this formula would keep the acid test ratio unaffected.

Short term debts are paid consolidated using long term debt funds. Here the payment is made out of long term debts which is in form of cash in asset side. So cash is decreased in asset side and current liability is decreased from liability side with same amount. It kept the acid test ratio unaffected.

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