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Question

Firm X and Y have the same quick ratio, but Firm X has a greater current ratio than Firm Y. Compared to Firm Y, it is most likely that Firm X has:

A Greater accounts payables Correct Answer Incorrect Answer
B Greater Inventory Correct Answer Incorrect Answer
C A higher receivable turnover ratio Correct Answer Incorrect Answer
D Higher sales Correct Answer Incorrect Answer
E Lower profits Correct Answer Incorrect Answer

Solution

"Inventory is not included in quick assets while calculating the quick ratio. But inventory is included in the numerator while calculating the current ratio. So, an increase in the numerator for Firm X because of greater inventory makes its current ratio more than Firm Y. Accounts payable are included in current liability, and it’s the same in the case of quick ratio and current ratio. We do not have full information about turnover ratios so can not comment on that. Therefore, greater inventory for Firm X will result in a higher current ratio"

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