Two companies have an identical amount of current assets and current liabilities. Chelmsford Inc. has 40% of its current assets invested in inventory, whereas Hanmer Corp. has 30% of its current assets invested in inventory. Which of the following statements is true?
A) Chelmsford will have the higher quick ratio.
B) Chelmsford will have the higher current ratio.
C) The companies are equally liquid because their current ratios are the same.
D) Chelmsford is less liquid than Hanmer.

Question

Quizplus · Accepted Answer

Chelmsford is less liquid than Hanmer because it has a higher percentage of current assets tied up in inventory, which is less liquid than other current assets like cash or receivables. This affects the quick ratio, which excludes inventory.

Two Companies Have an Identical Amount of Current Assets and Current