Question

Ace Company is a retail store. Due to competition, it is having trouble selling its products. Thus, inventory has been building up. Ace’s current ratio has not changed for the past three years, in spite of the inventory build up. Which of the following statements is true? a. As long as the current ratio remains constant, there is no need for concern. b. The composition of current assets and current liabilities does not matter. c. The management of Ace should consider the effect of slow moving inventory on its liquidity. d. Since inventory is a current asset, any increases should automatically cause the current ratio to rise.

Answer 1

Answer:

c. The management of Ace should consider the effect of slow moving inventory on its liquidity.

Explanation:

Liquidity is an important measure of a company's financial health, its calculation determines how well the company can pay off your short-term debts.  Inventory has a great impact on liquidity and it depends on how easily the company can sell it. As ACE is having trouble selling its products, it means that it takes a long time to sell its inventory, which does not help its liquidity since its inventory can not be easily be transformed into cash without losing its value, and that's why this company  management must consider moving inventory on its liquidity, in order to increase its current ratio, that means its ability to pay current, or short-term, liabilities (debt and payables) with its current, or short-term, assets (cash, inventory, and receivables).

If this company