If a company has a high current ratio but a low acid-test ratio, one can conclud
ID: 2635713 • Letter: I
Question
If a company has a high current ratio but a low acid-test ratio, one can conclude that:
the company has a large outstanding accounts receivable balance.
the company has a large investment in inventory.
the company has a large amount of current liabilities.
the company's financial leverage is very high.
the company has a large outstanding accounts receivable balance.
the company has a large investment in inventory.
the company has a large amount of current liabilities.
the company's financial leverage is very high.
Explanation / Answer
The correct answer is option C = the company has a large investment in inventory.
The formula to calculate current ratio = cash + marketable securities + accounts receivable + stock/inventory / current liabilities.
The formula to calculate acid test ratio = cash + marketable securities + accounts receivable / current liabilities.
If the inventory is high, then Current Ratio will be higher and Acid test ratio will be lower.
Hope my solution solves your query.
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