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      Question

      If a company’s current ratio is 2.5 and quick ratio is

      1.2, which of the following must be true?
      A The company has more current liabilities than current assets Correct Answer Incorrect Answer
      B Inventory forms a significant portion of current assets Correct Answer Incorrect Answer
      C There is a high debt-to-equity ratio Correct Answer Incorrect Answer
      D The company is not solvent Correct Answer Incorrect Answer
      E The company has negative working capital Correct Answer Incorrect Answer

      Solution

      A large gap between Current Ratio and Quick Ratio implies high inventory. Quick Ratio = (CA – Inventory)/CL → So, inventory must be significant.

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