Two firms have the same current ratio, 0.75, and the same amount of sales. However, Firm A has a higher inventory turnover ratio than Firm B. Therefore, we can conclude that the quick ratio of Firm A will be smaller than that of Firm B.

Question

Quizplus · Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory. Therefore, if Firm A has a higher inventory turnover ratio, it means that their average inventory is lower than that of Firm B. This would result in a higher quick ratio for Firm A, as the quick ratio excludes inventory from current assets. Therefore, the statement is false.

Two Firms Have the Same Current Ratio, 0