If a firm has a high current ratio but a low acid-test ratio, one can conclude...

If a firm has a high current ratio but a low acid-test ratio, one can conclude that:

a	the firm has a large outstanding accounts receivable balance.
b	the firm has a large investment in inventory.
c	the firm has a large amount of current liabilities.
d	the firm's financial leverage is very high.

Expert Solution

Solution :

The Answer is (b) the firm has a large investment in inventory.

Explanation :

Current Ratio measures the liquidity of the company to meet the short term obligation. Acid Ratio also measures the liquidity of the company however Acid Ratio is more conservative approach and it includes only those assets which can be turned quickly in cash like cash and cash equivalent, marketable securities, account receivable etc.

So the Major Difference in both ratio is that in Current Ratio, Current Assets Include Inventories while in Acid Test Ratio, Inventories are excluded.

So if any firm is has having high Current Ratio and Low Acid Test Ratio, It means that firm has large investment in Inventories resulting High Current Ratio. But when we excluded inventories from Current Assets, It will be resulting in Low Acid Test Ratio.

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ekkarill92 answered 2 years ago

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