After analysing a company's financial statements over a five-year period, the current year being Year 5, it was determined that the current ratio was as follows: 1.6:1 (Year 5); 1.5:1 (Year 4); 1.1:1 (Year 3); 0.95:1 (Year 3); 0.90:1 (Year 1). From this information we can conclude that the company has been increasing the amount of cash at bank.

Question

Quizplus · Accepted Answer

The current ratio measures a company's ability to pay its current liabilities with its current assets. An increasing current ratio may indicate an improvement in the company's liquidity, but it does not necessarily mean that the company has increased the amount of cash at bank. Other current assets, such as accounts receivable, inventory, or prepaid expenses, may have also increased, contributing to the higher current ratio. Moreover, the current ratio has fluctuated over the five-year period, indicating that the company's liquidity position has varied over time.

After Analysing a Company's Financial Statements Over a Five-Year Period