Asked by Ashley Lowell on May 27, 2024
Verified
A weakness of the current ratio is
A) the difficulty of the calculation.
B) that it doesn't take into account the composition of the current assets.
C) that it is rarely used by sophisticated analysts.
D) that it can be expressed as a percentage, as a rate, or as a proportion.
Current Ratio
The Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations with its short-term assets, indicating its financial health.
Current Assets
Assets that are expected to be converted into cash, sold, or consumed within one year or within the operating cycle of the business.
- Assess and examine a company's liquidity by employing ratios including the current ratio.
Verified Answer
KU
K U F A GAMINGMay 30, 2024
Final Answer :
B
Explanation :
The current ratio only considers the total amount of current assets compared to current liabilities. It does not differentiate between the different types of current assets, which can be problematic if some of those assets are not easily convertible to cash. For example, if a company has a high proportion of inventory in their current assets, it may take longer for them to sell off that inventory and convert it to cash than if they had a higher proportion of cash and marketable securities.
Learning Objectives
- Assess and examine a company's liquidity by employing ratios including the current ratio.