A firm's current ratio is above the industry average. However, the firm's quick ratio is below the industry average. These ratios suggest that the firm
A) has relatively more total current assets and even more inventory than other firms in the industry.
B) is very efficient at managing inventories.
C) has liquidity that is superior to the average firm in the industry.
D) is near technical insolvency.

Question

Quizplus · Accepted Answer

The firm's higher current ratio compared to the industry average indicates it has more total current assets relative to its current liabilities. However, a lower quick ratio suggests a larger proportion of its current assets are in inventory, which is less liquid than cash or receivables. This implies the firm has relatively more inventory compared to other firms in the industry.

A Firm's Current Ratio Is Above the Industry Average