In 2012,C Co reported a trade payables turnover ratio of 1.85 and a current ratio of 0.66.Their statement of financial position shows $2.1 billion in marketable securities not included in their current assets and good cash flow from operations.Which of the following interpretations is most likely?
A)Since the two ratios are fairly high,it indicates C Co has little difficulty paying its bills in a timely manner.
B)Since both these ratios are low,it might indicate poor liquidity and inability to pay vendors in a timely manner.
C)C Co practices aggressive cash management policies including investing excess cash and using vendors to finance operations by making slow payment to them.
D)C Co must be carrying a low amount of current liabilities in comparison to its total liabilities.

Question

Quizplus · Accepted Answer

The fact that C Co has a low current ratio and a high trade payables turnover ratio suggests that they may be using aggressive cash management policies, such as investing excess cash and paying vendors slowly. The $2.1 billion in marketable securities not included in current assets also supports this interpretation. Therefore, choice C is the most likely interpretation of the situation. Choices A, B, and D are unlikely given the information provided.

In 2012,C Co Reported a Trade Payables Turnover Ratio of 1.85