Acid Test Ratio Changes from Specific Events

Steps:

• Acid test ratio = (current assets excluding inventory) / current liabilities; measures immediate liquidity.
• Event 1 (cash collected from receivables): converts receivables to cash; both are quick assets, so numerator unchanged, ratio stable.
• Event 2 (cash paid to trade payables): reduces quick assets (cash) and current liabilities by same amount; ratio decreases as liquid assets are depleted faster relative to liabilities.
• Event 3 (inventory destroyed): reduces inventory, which is excluded from numerator; no impact on quick assets or liabilities, ratio unchanged.

Why C is correct:

• Only event 2 reduces quick assets without a proportional or greater reduction in liabilities, lowering the ratio per the formula.

Why the others are wrong:

• A: Event 1 does not decrease the ratio, as quick assets remain the same.
• B: Event 3 has no effect, as inventory is not part of quick assets.
• D: Event 3 alone does not affect the ratio.

Final answer: C