If a firm has a high current ratio but a low acid-test ratio,one can conclude that:
A) the firm has a large outstanding accounts receivable balance.
B) the firm has a large investment in inventory.
C) the firm has a large amount of current liabilities.
D) the firm's financial leverage is very high.

Question

Quizplus · Accepted Answer

A high current ratio indicates that the firm has more current assets than current liabilities, which is a good sign of short-term liquidity. However, a low acid-test ratio indicates that the firm may have a large investment in inventory, which is not as easily converted into cash. This means that the firm may not be able to meet its short-term obligations as easily as a firm with a higher acid-test ratio. Therefore, option B is the best choice.

If a Firm Has a High Current Ratio but a Low