In Comparing the Current Ratios of Two Companies,why Is It

question 46

Multiple Choice

In comparing the current ratios of two companies,why is it invalid to assume that the company with the higher current ratio is the better company?

• A) The two companies may be different sizes.
• B) A high current ratio may indicate inadequate inventory on hand.
• C) The two companies may define working capital in different terms.
• D) A high current ratio may indicate inefficient use of various assets and liabilities.

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Definitions:

Adverse Selection

A situation in economics where asymmetric information results in high-quality goods or services being crowded out of the market by low-quality goods or services because of the inability of buyers to distinguish between the two.

Asymmetric Information

A situation where one party in a transaction has more or better information than the other, leading to an imbalance of power.

Low-quality Goods

Products that do not meet the expected standards of durability, performance, or satisfaction.

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Messages aimed at influencing the attitudes or behaviors of people, usually for the purpose of selling products or services.