Asked by Alyssa Grant on May 22, 2024
Verified
A firm's current ratio is above the industry average. However, the firm's quick ratio is below the industry average. These ratios suggest that the firm
A) has relatively more total current assets and even more inventory than other firms in the industry.
B) is very efficient at managing inventories.
C) has liquidity that is superior to the average firm in the industry.
D) is near technical insolvency.
Quick Ratio
A measure of a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory, also known as the acid-test ratio.
Current Ratio
A liquidity metric that measures a company’s ability to pay short-term obligations with its current assets.
Industry Average
The average performance, metrics, or characteristics of companies within a particular sector.
- Evaluate a firm's liquidity using current and quick ratios.
Verified Answer
NA
Norma AlmanasirMay 23, 2024
Final Answer :
A
Explanation :
The firm's higher current ratio compared to the industry average indicates it has more total current assets relative to its current liabilities. However, a lower quick ratio suggests a larger proportion of its current assets are in inventory, which is less liquid than cash or receivables. This implies the firm has relatively more inventory compared to other firms in the industry.
Learning Objectives
- Evaluate a firm's liquidity using current and quick ratios.