The Rule of Thumb for the Current Ratio Is 2:1

question 106

Multiple Choice

The rule of thumb for the current ratio is 2:1.When would a current ratio below this threshold not necessarily be a concern for a company?

• A)When cash flows are steady and reliable
• B)When inventories are high
• C)When accounts receivable balances are high
• D)None of these choices are correct

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Definitions:

Compounding Interval

The frequency at which interest is added to the principal amount of an investment or loan, influencing the total amount of interest earned or paid.

Compounded Semi-Annually

The calculation of interest on a principal sum twice a year, effectively increasing the amount on which future semi-annual interest payments are calculated.

Annuity

An investment vehicle that delivers a steady flow of payments to a recipient, predominantly designed to be a revenue stream for retired persons.

Compounded Semi-Annually

The process of calculating interest on both the initial principal and the accumulated interest from previous periods on a semi-annual basis.