Question

If the trend of the current ratio is increasing, while the trend of the acid-test ratio is decreasing over a period of time, this could be a warning that the firm is:A) Depleting its inventories.B) Having trouble collecting its receivables.C) Purchasing too much treasury stock.D) Paying "extra" dividends.E) Carrying excess inventories.

Answer 1

E) Carrying excess inventories.

Step-by-step explanation:

If the current ratio increase from the analisys of the current ratio formula we can state that:

current assets increase at a higher rate than current liabilities

As the acid-test decrease over time we can state that:

assets less inventory increase at a lower rate than current liaiblities.

This means inventory is the main driver of the increasein the company's assets Thus, the organization is carrying inventories (and their accounts payable liaiblities associate wiht it) which are sale and collected at the same rate. The firm should decrease their inventory stock