51. A firm has a current ratio of 5.4 and a quick ratio of 2.3, while the industry norm is 4.5 for the current ratio and 3.2 for the quick ratio. What does the comparison of the current ratio and quick ratio of the firm to the industry indicate?
Answer: B
The firm has higher inventory holding than the industry average.
The comparison indicates that the firm has a current ratio of 5.4, which is higher than the industry norm of 4.5, suggesting a stronger liquidity position. However, the quick ratio of 2.3 is lower than the industry norm of 3.2, indicating that the firm's liquidity is affected by its inventory levels, which are likely higher than average.
A) The firm has lower inventory holding than the industry average.
This option is incorrect because the firm's higher current ratio compared to the industry norm implies that it has more current assets relative to its current liabilities. A lower inventory holding would typically result in a higher quick ratio, not a lower one.
B) The firm has higher inventory holding than the industry average.
This option is correct as the firm's current ratio exceeds the industry average, indicating it has a larger amount of current assets. The lower quick ratio suggests that a significant portion of those assets is tied up in inventory, resulting in relatively less liquidity when excluding inventory.
C) The firm has higher accounts receivable holding than the industry average.
This option is incorrect because the current and quick ratios do not directly indicate accounts receivable levels. The firm's higher current ratio does not confirm that it has higher accounts receivable; it may simply reflect higher inventory.
D) The firm has lower accounts receivable holding than the industry average.
This option is also incorrect as the ratios do not provide explicit information about accounts receivable. The firm’s ratios do not suggest lower accounts receivable; rather, they imply a balance between current assets and liabilities, influenced by inventory levels.
Conclusion
The correct answer is that the firm has higher inventory holding than the industry average, as indicated by the relationship between its current and quick ratios. The firm’s current ratio is significantly higher than the industry average while its quick ratio is lower, suggesting that its liquidity is impacted by a higher inventory level compared to its peers. Other options fail to accurately represent the implications of the ratio comparison.