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    Question

    A firm reports the following data over two years:

    Assuming no significant change in asset quality or liquidity structure, which of the following is the best interpretation ?
    A The firm’s liquidity position has improved significantly in Year 2. Correct Answer Incorrect Answer
    B The firm’s liquidity position has weakened despite an increase in current assets. Correct Answer Incorrect Answer
    C The firm's working capital has increased. Correct Answer Incorrect Answer
    D The firm is now highly solvent. Correct Answer Incorrect Answer
    E The inventory turnover ratio has improved. Correct Answer Incorrect Answer

    Solution

    Step 2: Calculate Current Ratio for both years Step 3: Interpretation •  Although current assets increased from ₹10 lakh to ₹12 lakh, •  current liabilities increased more sharply from ₹5 lakh to ₹8 lakh, •  Resulting in a decrease in working capital from ₹5 lakh to ₹4 lakh, •  And a lower current ratio, indicating a weakened liquidity position.

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