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WTBCPA
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Joined: 01 Jun 2011
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Posted: 07 Oct 2011 at 17:05 \| IP Logged

Zenk Co. wrote off obsolete inventory of $100,000 during the year. What was the effect of this write-off on Zenk's ratio analysis?

A. Increase in current ratio but no in quick ratio
B. Decrease in current ratio but not in quick ratio
C. Decrease in quick ratio but not in current ratio
D. Increase in quick ratio but not in current ratio.

Answer: B

May someone help me out with this question. Why is not C?

Current ratio: current assets/current liabilities

Quick ratio: current assets - inventory / current liabilities

Inventory needed to be calculated in quick ratio, why it doesn't have effect of this write off?

How would you do if u see this type of question? Any suggestions for memorizing all types of ratios??

Thanks a lot!!!

brachno1
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Posted: 07 Oct 2011 at 17:25 \| IP Logged

The quick ratio compares the total amount of cash + marketable
securities + accounts receivable to the amount of current liabilities. If a
company has cash + marketable securities + accounts receivable with a
total of $1,000,000 and the company’s total amount of current liabilities
is $1,200,000, its quick ratio is 0.83 to 1. ($1,000,000 divided by
$1,200,000 = 0.83)

The quick ratio differs from the current ratio in that some current assets
are excluded from the quick ratio. The most significant current asset that
is excluded is inventory. The reason is that inventory might not turn to
cash quickly.

Hope this helps.

WTBCPA
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Posted: 07 Oct 2011 at 17:41 \| IP Logged

I see now.

Thanks for your help again

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