Acid-test ratio fluctuations due to liability changes

Steps:

• Recall acid-test (quick) ratio formula: (Current assets - Inventory) / Current liabilities.
• Note ratio progression: Year 1 (1:2 or 0.5), improves to Year 2 (1:1 or 1.0), then declines to Year 3 (1:6 or ~0.17).
• Identify that improvement from Year 1 to 2 requires numerator increase or denominator decrease; decline to Year 3 requires opposite.
• Evaluate options: Focus on changes affecting quick assets (numerator) or current liabilities (denominator) to match pattern.

Why B is correct:

• Decreasing other payables reduces current liabilities (denominator), increasing the ratio from Year 1 to 2; if decrease reverses or other factors dominate in Year 3, it explains the decline.

Why the others are wrong:

• A: Inventory increase does not affect quick ratio, as inventory is excluded from numerator.
• C: Trade payables increase raises liabilities, consistently decreasing ratio, not matching Year 1-2 improvement.
• D: Trade receivables decrease lowers quick assets (numerator), consistently decreasing ratio, not explaining improvement.

Final answer: B