Acid test ratio decreases with reduced quick assets or increased current liabilities

Steps:

• Identify test ratio as acid test (quick) ratio: (current assets - inventory) / current liabilities; higher is better for liquidity.
• Action 1: Reduces inventory only; quick assets unchanged, current liabilities unchanged; ratio unchanged.
• Action 2: Reduces quick assets (cash) and current liabilities equally; ratio increases (improves, assuming ratio > 1).
• Action 3: Increases current liabilities (trade credit for purchase); quick assets unchanged; ratio decreases.
• Action 4: Reduces quick assets (cash used for repayment); current liabilities unchanged; ratio decreases.

Why D is correct:

• Actions 3 and 4 decrease the acid test ratio by either raising the denominator or lowering the numerator, per the formula.

Why the others are wrong:

• A: Action 1 unchanged; action 2 improves ratio.
• B: Action 1 unchanged; action 4 worsens but paired incorrectly.
• C: Action 2 improves; action 3 worsens but paired incorrectly.

Final answer: D