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. a warning that the firm is: paying "extra" dividends.
b. purchasing too much treasury stock.
c. carrying excess inventories.
d. depleting its inventories.
e. having trouble collecting its accounts receivables.

Answer 1

c. carrying excess inventories.

Step-by-step explanation:

The current ratio of a company is used to measures whether the company has enough of its resources to meet the short-term obligations. It is used to compare an organization's current assets to the current liabilities of it. It is also known as liquidity ratio.

The acid test ratio compares a company's total cash and accounts receivable to the total current liabilities of the company. It is also known as quick ratio.

The current ratio of a company is increasing means the company is having more inventories in stock. This inventories can be considered as assets which is not quickly liquidated.

Hence the correct option is (c).