Which of the following statements about liquidity ratios is ?

Question

Quizplus · Accepted Answer

The statement "The higher the current ratio, the more likely a firm is able to pay its short-term obligations" is true. This is because current ratio measures a company's ability to pay its short-term liabilities with its current assets. A higher current ratio means that a company has more current assets to cover its current liabilities and is therefore more likely to be able to meet its short-term obligations.

B, C, D, and E are incorrect statements. The lower the quick ratio relative to the current ratio does not necessarily make a firm safer in terms of liquidity; this is because the quick ratio measures a company's ability to pay its current liabilities using only its most liquid assets. The ratio of net working capital to total assets can be greater than 1 if a company has a negative net working capital. Relatively high current ratios may also indicate inefficient working capital management rather than efficient management. Lastly, a lower current ratio means that a firm has fewer current assets to cover its current liabilities which makes it less likely to be able to meet its short-term obligations.

Which of the Following Statements About Liquidity Ratios Is