If a firm's current ratio is 1.5,
A)its current liabilities exceed its current assets
B)it is possible for its quick ratio to be 2.0
C)it is possible for its quick ratio to be 1.0
D)its current assets equal its current liabilities

Question

Quizplus · Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. A current ratio of 1.5 means that for every $1 of current liabilities, the firm has $1.5 of current assets. It does not necessarily mean that current liabilities exceed current assets.

For the quick ratio to be 2.0, the firm would need to have a higher level of quick assets (i.e. cash, marketable securities, and accounts receivable) relative to the level of current liabilities. Therefore, option B is incorrect.

However, it is possible for the quick ratio to be 1.0 or lower, depending on the composition of the firm's current assets. If the majority of the current assets are in inventory, for example, they may not be very liquid and could not be easily converted into cash to pay current liabilities. Therefore, option C is correct.

Option D is incorrect because the current assets exceed current liabilities by 1.5 times, not equal to.

If a Firm's Current Ratio Is 1.5