Clokgel Inc.likes to maintain a current ratio near 1.4; however,the CFO for Clokgel,Inc.has noticed a decline in previous months.The current ratio for April,2012 produced a ratio of 0.6.What would be the CFO's major concern with a declining current ratio?
A)The company has not sold enough products on credit,thus distorting the accounts receivable balance and the current ratio.
B)The company may have difficulty meeting its short-term obligations.
C)The company has not purchased enough inventory to meet current demand.
D)Long-term obligations such as notes payable may need to be deferred,causing potential investor concerns.
E)The company has excessive holdings of current assets.

Question

Quizplus · Accepted Answer

A declining current ratio indicates that the company may have insufficient current assets (such as cash or accounts receivable) to meet its short-term obligations (such as paying suppliers or creditors). This can lead to cash flow problems and potential default, which would be a major concern for the CFO.