A company with a current ratio higher than industry average must also have a quick ratio higher than industry average because both ratios measure liquidity.

Question

Quizplus · Accepted Answer

The current ratio and quick ratio measure different aspects of liquidity. The current ratio includes all current assets in the numerator, including inventory and prepaid expenses, which may not be quickly convertible to cash. The quick ratio, on the other hand, only includes highly liquid assets such as cash, marketable securities, and accounts receivable. Therefore, a company can have a high current ratio due to a large amount of inventory and prepaid expenses, but a lower quick ratio if it has difficulty converting those assets into cash quickly.

A Company with a Current Ratio Higher Than Industry Average