Which of the following statements is true?
A) The smaller the current ratio the more liquid the ﬁrm.
B) Since inventory is not as liquid as the other current assets it is excluded in calculation of the quick ratio.
C) A current ratio of greater than one indicates net working capital is negative.
D) In ﬁrms with inventory the quick ratio will always exceed the current ratio.
E) A current ratio can be less than zero.

Question

Quizplus · Accepted Answer

The statement "Since inventory is not as liquid as the other current assets it is excluded in calculation of the quick ratio" is true. The quick ratio (also known as the acid-test ratio) only includes the most liquid current assets such as cash, marketable securities, and accounts receivable, and excludes inventory. This is because inventory may take longer to convert into cash and may lose value over time.

Which of the Following Statements Is True