Asked by Efrem Wondale on Jun 08, 2024
Verified
Which of the following is false?
A) The cash ratio is the least stringent but most reliable test of liquidity.
B) A company with a high level of inventory will have a quick ratio significantly lower than its current ratio.
C) A current ratio that is too high could indicate funds tied up in inventory and other working capital assets.
D) Analysts consider a current ratio of 2 to be financially conservative.
Quick Ratio
A measure of a company's ability to meet its short-term obligations with its most liquid assets, calculated as (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.
Current Ratio
A ratio indicating how well a company can cover its short-term dues.
- Distinguish the variations and importances among liquidity measures like quick ratio, current ratio, and cash ratio.
Verified Answer
LM
Leigh MemunatuJun 09, 2024
Final Answer :
A
Explanation :
The cash ratio is actually the most stringent and least liquid measure of liquidity, not the least stringent but most reliable. It only considers cash and cash equivalents against current liabilities, making it a strict test of liquidity.
Learning Objectives
- Distinguish the variations and importances among liquidity measures like quick ratio, current ratio, and cash ratio.