Series 79 practice questionmediumLiquidity Ratios
A company's current ratio is 1.0, and its quick ratio is 0.5. What does this suggest about its inventory levels relative to current assets?
- AInventory makes up half of current assets✓ Correct answer
- BInventory is a negligible portion of current assets
- CInventory is greater than total current assets
- DInventory equals current liabilities
Explanation
Why A — Inventory makes up half of current assets
Current ratio = Current Assets / Current Liabilities; quick ratio = (Current Assets - Inventory) / Current Liabilities = 0.5. The difference (1.0 - 0.5 = 0.5) reflects inventory, so inventory is half of current assets.
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