Answer:
Explanation:
The Current Ratio is calculated by dividing all current assets by the current liabilities of a company. If Inventory is purchased with cash, there will be no effect on the Current ratio because both inventory and cash are current assets so the transaction would cancel itself out.
The Acid-test ratio however is calculated by dividing the most liquid current assets by current liabilities which means that Inventory is not part of the Current assets used. The use of cash for inventory will reduce the amount of current assets being divided by current liabilities for the ratio thereby resulting in a smaller ratio.
