Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company. True or false?

Question

Luna Choi

Business

20 December, 10:08

Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company. True or false?

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Answers (1)

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Elsie Cervantes · Answer 1

false

Explanation:

To measure liquidity, accountants use liquidity ratio, quick ratio, or acidity test is the most common. Liquidity measures the ability of a company to meet its current liabilities as they become due. Current liabilities are paid for using current assets. A firm is liquid if its quick ratio should be at least 1.

Dividing quick assets by current liabilities gives a quick ratio. Quick asset refers to items that can be converted to cash with 90 days. They include cash and cash equivalents, current receivables, and short-term investments. Inventory is not considered in the calculations of quick ratio as it has not yet been sold. They are no guarantee that it will be sold and paid for in 90 days. Firms with the same level of current assets and current liabilities have the same level of liquidity.