Finance Ch. 4

Quick Ratio Equation

(Current Assets - Inventory) / Current Liabilities

Current Ratio Equation:

Current Assets / Current Liabilities

(T/F) An increase in the current ratio over time always means that the company's liquidity position is improving.

False

(T/F) A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities.

True

(T/F) An increase in the quick ratio over time usually means that the company's liquidity position is improving and that the company is managing its short-term assets well.

True

(T/F) If a company has a quick ratio of less than 1 but a current ratio of more than 1 and if the difference between the two ratios is large, then the company depends heavily on the sale of its inventory to meet its short-term obligations.

True

(T/F) If a company's current liabilities are increasing faster than its current assets, the company's liquidity position is weakening

True