If a company has a high current ratio but a low acid-test ratio, one can conclude that:
A) the company has a large outstanding accounts receivable balance.
B) the company has a large investment in inventory.
C) the company has a large amount of current liabilities.
D) the company's financial leverage is very high.

Question

Quizplus · Accepted Answer

A high current ratio indicates that the company has enough current assets to cover its current liabilities, which includes inventory. However, a low acid-test ratio indicates that the company does not have enough liquid assets to cover its current liabilities without relying on inventory. This suggests that the company has a large investment in inventory, which is lowering the acid-test ratio.

If a Company Has a High Current Ratio but a Low