O Level Accounting (7707)•7707/12/M/J/23
Explanation
Acid-Test Ratio Decrease
Steps:
- Recall acid-test ratio formula: (current assets excluding inventory) / current liabilities.
- Note ratio decreased from 1 January to 31 December 2022.
- Identify changes affecting numerator (cash, receivables) or denominator (liabilities).
- Evaluate options: only decreasing receivables reduces numerator, lowering ratio.
Why D is correct:
- Trade receivables are in the numerator; decreasing them reduces the ratio per the formula.
Why the others are wrong:
- A: Bank overdraft decrease reduces denominator, increasing ratio.
- B: Inventory excluded from numerator, so no effect.
- C: Other payables decrease reduces denominator, increasing ratio.
Final answer: D
Topic: Calculation and understanding of accounting ratios
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