Acid-Test Ratio Decreases with Lower Quick Assets

Steps:

• Recall acid-test (quick) ratio formula: (current assets - inventory) / current liabilities.
• Note ratio was higher on 1 Jan 2019 than 31 Dec 2019, so it decreased over the year.
• Identify changes affecting numerator (quick assets: cash, receivables, etc.) or denominator (current liabilities).
• Evaluate each option's impact on the ratio.

Why D is correct:

• Trade receivables are quick assets; their decrease reduces the numerator while holding the denominator constant, lowering the ratio per the formula.

Why the others are wrong:

• A: Bank overdraft decrease reduces current liabilities (denominator), increasing the ratio.
• B: Inventory decrease does not affect the numerator, as inventory is excluded from quick assets.
• C: Other payables decrease reduces current liabilities (denominator), increasing the ratio.

Final answer: D