4..8

a. The current ratio starts at 1.2/1.0 = 1.2. The transaction will reduce current assets to $.7 million and current liabilities to $.5 million. The current ratio increases to .7/.5 = 1.4. Net working capital is unaffected: Current assets and current liabilities fall by equal amounts.

b. The current ratio is unaffected, since the firm merely exchanges one current asset (cash) for another (inventories). However, the quick ratio will fall since inventories are not included among the most liquid assets.