Which of the following statements is true of a current ratio?
A)The larger a firm's current ratio, the harder it is for the firm to pay its short-term debts.
B)The current ratio is a type of leverage ratio.
C)A current ratio below 1.0 signifies a company's inability to pay its short-term liabilities with its current assets.
D)The current ratio is computed by dividing a firm's current liabilities by its current assets.

Question

Quizplus · Accepted Answer

A current ratio below 1.0 means that a company does not have enough current assets to cover its current liabilities, indicating an inability to pay short-term debts. A current ratio above 1.0 implies that a company has enough current assets to cover its current liabilities, and a higher current ratio generally indicates better short-term liquidity. Option A is incorrect because a higher current ratio means that a firm has a stronger ability to pay its short-term debts. Option B is incorrect because the current ratio does not measure the extent to which a company relies on debt to finance its operations. Option D is incorrect because the current ratio is computed by dividing a firm's current assets by its current liabilities, not the other way around.

Which of the Following Statements Is True of a Current