Questions: Multiple Choice Question Poppy Corporation has a current ratio of 2.0 and a quick ratio of 1.6 . Poppy purchases additional inventory for cash. Which of the following occurs? The current ratio will remain the same. The current ratio will decrease. Working capital decreases. The quick ratio will increase.

The answer is the second one: The current ratio will decrease.

Explanation for each option:

1. The current ratio will remain the same.

   • Incorrect. The current ratio is calculated as current assets divided by current liabilities. When Poppy Corporation purchases additional inventory for cash, the cash (a current asset) decreases, and inventory (also a current asset) increases by the same amount. However, since inventory is included in the current assets for the current ratio but not in the quick ratio, the overall effect is a decrease in the current ratio because the quick assets (current assets minus inventory) decrease.

2. The current ratio will decrease.

   • Correct. As explained above, purchasing inventory for cash reduces the amount of quick assets (cash), which are part of the numerator in the current ratio calculation. Since the total current assets remain the same but the quick assets decrease, the current ratio decreases.

3. Working capital decreases.

   • Incorrect. Working capital is calculated as current assets minus current liabilities. Since the purchase of inventory for cash does not change the total amount of current assets or current liabilities, the working capital remains unchanged.

4. The quick ratio will increase.

   • Incorrect. The quick ratio is calculated as (current assets - inventory) divided by current liabilities. Since the purchase of inventory for cash decreases the amount of quick assets (by reducing cash), the quick ratio will actually decrease, not increase.

In summary, purchasing additional inventory for cash decreases the current ratio because it reduces the amount of quick assets without affecting the total current assets or current liabilities.