A company has a high current ratio but a low quick ratio. This likely indicates that:The company has a high level of receivables.The company has minimal current liabilities.The company has a significant amount of inventory.The company has a high level of cash and equivalents.strikethrough_schat_bubble_outline
Question
A company has a high current ratio but a low quick ratio. This likely indicates that:The company has a high level of receivables.The company has minimal current liabilities.The company has a significant amount of inventory.The company has a high level of cash and equivalents.strikethrough_schat_bubble_outline
Solution
The company has a significant amount of inventory.
Explanation: The current ratio is calculated as current assets divided by current liabilities. A high current ratio indicates that a company has more current assets than current liabilities.
The quick ratio, on the other hand, is calculated as (current assets - inventory) divided by current liabilities. A low quick ratio, despite a high current ratio, suggests that a significant portion of the company's current assets is tied up in inventory. This is because inventory is subtracted from current assets in the quick ratio calculation. If the company had a high level of cash, receivables, or minimal current liabilities, it would likely also have a high quick ratio. Therefore, the most likely explanation for a high current ratio and a low quick ratio is a significant amount of inventory.
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