Which of the following statements concerning the current ratio is true?

I. It is always larger than the acid-test (quick) ratio.
II. Companies can window-dress their current ratios.
III. In isolation the current ratio has little meaning.
IV. It is a good indicator of solvency of a company.

A)I, II, III, and IV
B)I, II, and III
C)II, III, and IV
D)I, II, and IV

Question

Which of the following statements concerning the current ratio is true?

I. It is always larger than the acid-test (quick) ratio.
II. Companies can window-dress their current ratios.
III. In isolation the current ratio has little meaning.
IV. It is a good indicator of solvency of a company.

A)I, II, III, and IV
B)I, II, and III
C)II, III, and IV
D)I, II, and IV

Quizplus · Accepted Answer

Statement I is false as the acid-test (quick) ratio excludes inventory, which can make it higher than the current ratio. Statement II is true as companies can manipulate their current assets and liabilities to improve their current ratio. Statement III is true as the current ratio does not provide information about a company's ability to pay its debts in the long term. Statement IV is false as the current ratio measures short-term liquidity, not solvency. Therefore, the best choice is B, as it accurately reflects the accuracy and limitations of the current ratio.

Which of the Following Statements Concerning the Current Ratio Is