If a company\'s current ratio increases from 1.1 to 1.3 from one year to the nex

Question

If a company's current ratio increases from 1.1 to 1.3 from one year to the next, it can be concluded that:

A. the liquidity has increased.
B. the current assets have increased.
C. the current liabilities have decreased.
D. None of the above

Two companies, A and B, have the same ROEs, but Company A has a higher residual income. Which of the following would explain this, all else equal? A. Company A is riskier than Company B. B. Company A has higher expected future growth. C. Company A has greater net book value. D. Company A has lower ROA.

Explanation / Answer

Part 1

All options are correct.

Part 2 = option A, B and C are correct.

Current Ratio is measure of liquidty of company. It is caluclated by dividing current asset by current liability.

Hence if the current ratio is increasing that means that current asseet has increase or current liability has fallen.

Also increase in current asset means that for 1 dollar of current liability we have current asset worth 1.3 as compared to last year of 1.1 which means the liquity has increased.

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