medium · Financial Accounting financial-statement-analysis-ratios
A retailer has a quick (acid-test) ratio of 0.9 and a current ratio of 1.8. At year-end it uses $100,000 of cash to prepay 12 months of rent (recorded as a current prepaid asset).
All else equal, what is the directional effect on the two ratios immediately after this transaction?
- The quick ratio falls and the current ratio is unchanged, because cash (a quick asset) is replaced by a prepaid asset that is current but not quick
- Both ratios fall, because total current assets decrease once the $100,000 prepayment reduces the firm's overall cash and equivalents balance
- The quick ratio is unchanged and the current ratio rises, because prepaid rent counts as a more liquid current asset than cash on this balance sheet
- Both ratios are unchanged, because the transaction merely reclassifies one current asset into another current asset of exactly identical recorded dollar value
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