Scenario 8-2. Denny's Diner is undergoing an analysis of its current financial statements. Denny is interested in seeing how his business compares to the industry. In order to make this comparison, Denny has developed the following ratios. He has come to you for an interpretation of his numbers.
$$\begin{array} { l l l l }
&\text { Denny's Diner } & \text { Industry } & \
\text { Current Ratio }& 1.51 & 1.62 \
\text { Average Collection Period } & 2.50 & 5.00 \
\text { Inventory Turnover } & 80 & 75 \
\text { Debt Ratio } &43 \% & 52 \% \
\text { Net Profit Margin } & 10.2 & 8.3
\end{array}$$
-In Scenario 8-2, after analyzing the current ratio, you determined that ______.
A) Denny has a problem
B) Denny can cover his current liabilities 1.51 times with his current assets
C) Denny is too far off of the industry average in this case
D) Denny has inventory that cannot easily be converted into cash

Question

Scenario 8-2. Denny's Diner is undergoing an analysis of its current financial statements. Denny is interested in seeing how his business compares to the industry. In order to make this comparison, Denny has developed the following ratios. He has come to you for an interpretation of his numbers.
$$\begin{array} { l l l l } 
&\text { Denny's Diner } & \text { Industry } & \
\text { Current Ratio }& 1.51 & 1.62 \
\text { Average Collection Period } & 2.50 & 5.00 \
\text { Inventory Turnover } & 80 & 75  \
\text { Debt Ratio } &43 \% & 52 \%  \
\text { Net Profit Margin } & 10.2 & 8.3 
\end{array}$$
-In Scenario 8-2, after analyzing the current ratio, you determined that ______.
A) Denny has a problem
B) Denny can cover his current liabilities 1.51 times with his current assets
C) Denny is too far off of the industry average in this case
D) Denny has inventory that cannot easily be converted into cash

Quizplus · Accepted Answer

The current ratio of 1.51 indicates that Denny's Diner can cover its current liabilities 1.51 times with its current assets, which is a measure of liquidity. This ratio is slightly below the industry average of 1.62 but does not necessarily indicate a significant problem, nor does it suggest that Denny has inventory that cannot easily be converted into cash.

Scenario 8-2 -In Scenario 8-2, After Analyzing the Current Ratio, You Determined