Certified Management Accountant Practice Exam 2025 – The Comprehensive All-in-One Guide to Exam Success!

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What is the effect on the cash ratio when materials are purchased on account?

The cash ratio will increase

The cash ratio will remain the same

The cash ratio will decrease

When materials are purchased on account, the cash ratio is affected through changes in both cash and current liabilities. The cash ratio is defined as cash, cash equivalents, and marketable securities divided by current liabilities.

When materials are bought on account, cash is unchanged since there is no immediate outflow of cash. However, current liabilities increase because the purchase creates a payable. As a result, the denominator of the cash ratio increases while the numerator remains constant.

This leads to a decrease in the cash ratio because the ratio is now a smaller value—cash divided by a larger current liabilities total. Hence, the correct choice illustrates that the cash ratio will decrease as a direct consequence of purchasing materials on account.

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The cash ratio will fluctuate wildly

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