Adkins Company has a current ratio of 1.0 and a debt ratio of 0.7.Wilson Company has a current ratio of 1.4 and a debt ratio of 0.5.Both companies are in the same industry.Which of the following statements is TRUE?
A)The two companies' debt ratios and current ratios vary in different directions,and the companies appear to be in similar financial shape.
B)The two companies' debt ratios and current ratios vary in different directions,and these results do not make sense.
C)Wilson Company appears to be in better financial shape than Adkins Company.
D)Adkins Company appears to be in better financial shape than Wilson Company.

Question

Quizplus · Accepted Answer

A higher current ratio indicates a company has more short-term assets to cover its short-term liabilities, which is generally viewed as positive. Wilson Company has a higher current ratio than Adkins Company, indicating it is in a better position to cover its short-term liabilities. A lower debt ratio indicates a company has less debt relative to its assets, which is also generally viewed as positive. Wilson Company also has a lower debt ratio than Adkins Company, indicating it is in a better position to manage its debt obligations. Therefore, Wilson Company appears to be in better financial shape than Adkins Company despite the fact that their debt ratios and current ratios vary in different directions.

Adkins Company Has a Current Ratio of 1