Question

Why might the current and quick ratios for the electric utility and the​ fast-food stock be so much lower than the same ratios for the other​ companies? ​(select all the answers that​ apply.)
a. their inventory balances are going to be very close to zero because it is impossible to stockpile electricity and burgers.


b. their accounts receivable balances are going to be much lower than for the other two companies.


c. the explanation for the lower current and quick ratios most likely rests on the fact that these two industries operate primarily on a cash basis.


d. the explanation for the lower current and quick ratios most likely relates to poor management performance?

Answer 1

Current ratio is a comparison of current assets to current liabilities, calculated by dividing your current assets by your current liabilities.

The quick ratio compares the total amount of cash + marketable securities + accounts receivable to the amount of current liabilities.

A. Inventory would be a factor in both of these ration (assets). In both of these industries, inventory would be low. You cannot readily stockpile energy and burgers are perishable items.

B. It is true that both of these industries would have low outstanding accounts receivable because people will need their power to survive and fast food places don't offer credit.

C. These two industries deal with cash mainly. Cash doesn't have to be physical currency, but accounts that can easily be paid.

D. Low current and quick ratios are actually signs of good management not poor management.

All of the above are correct EXCEPT answer D.