The inventory turnover and current ratios are related. The combination of a high current ratio and a low inventory turnover ratio relative to the industry norm might indicate that the firm is maintaining too high an inventory level or that part of the inventory is obsolete or damaged.

Question

Quizplus · Accepted Answer

A high current ratio indicates that a company has enough current assets to pay off its current liabilities, while a low inventory turnover ratio suggests that the company is not efficiently selling its inventory. When these two ratios are analyzed together, a high current ratio and low inventory turnover ratio could suggest that there is excess inventory that is not being sold, which could be due to obsolescence, damage, or just overstocking. Therefore, the statement is true.

The Inventory Turnover and Current Ratios Are Related