If a Company's Current Ratio Declined in a Year During

question 13

Multiple Choice

If a company's current ratio declined in a year during which its quick ratio improved, which of the following is the most likely explanation?

• A) Inventory is increasing.
• B) Inventory is declining.
• C) Receivables are being collected more rapidly than in the past.
• D) Receivables are being collected more slowly than in the past.

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Definitions:

A Credit Rating

This is an evaluation of the credit risk of a prospective debtor, predicting their ability to pay back the debt and an implicit forecast of the likelihood of the debtor defaulting.

Note

Unsecured debt, usually with a maturity under 10 years.

Protective Covenant

A clause in a financial contract that restricts certain actions of the borrower to protect the lender's interests.

Liquidity Premium

The additional return investors demand for holding a security that is not easily convertible into cash without loss of value.