Question

Which of the following is true of current ratio?

Select one:

a. A higher current ratio indicates a higher return on equity.

b. The more predictable a firm's cash flows, the higher the acceptable current ratio.

c. The more predictable a firm's current ratio, the higher the current liabilities.

d. A higher current ratio indicates a greater degree of liquidity.

Answer 1

The correct answer is D

Step-by-step explanation:

Current ratio (CR) is the one which measures the current assets in respect to the current assets which is stated as:

CR = Current Assets / Current Liabilities

So, it depicts that there is sufficient amount of current assets like inventory, cash or accounts receivable to meet the current liabilities like accounts payable or creditors.

So, higher current ratio states the higher amount of liquidity for the firm.