Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will the purchase of inventory with cash affect each ratio?

A) Increase the current ratio and increase the acid-test ratio.

B) No change to the current ratio and decrease the acid-test ratio.

C) Decrease the current ratio and decrease the acid-test ratio.

D) Decrease the current ratio and increase the acid-test ratio.

Answer: B

Which of the following measures of liquidity does not control for the relative size of the company?

A) Working capital.

B) Current ratio.

C) Acid-test ratio.

D) They all control for the relative size of the company.

Answer: A

The acid-test ratio is

A) Current assets divided by current liabilities.

B) Cash and short-term investments divided by current liabilities.

C) Cash, short-term investments, and accounts receivable divided by current liabilities.

D) Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.

Answer: C