Which statement is not correct?

Question

BlackTom AI · Accepted Answer

The prompt asks which statement is not correct, so I will evaluate each option for accuracy before identifying the incorrect one.
Option a: 'High liquidity ratios are not necessarily desirable.' This is a reasonable and commonly accepted point. Very high liquidity ratios can indicate that a company is holding too much current assets relative to current liabilities, which might suggest inefficiency in using assets to generate returns. Therefore, this statement is correct.
Option b: 'A current ratio of greater than 2:1 means that an entity does not have sufficient liquidity to pay its debts as they fall due.' This claim runs counter to the basic meaning of the current ratio. A ratio above 2:1 typically signals stronger liquidity, not insufficient liquidity; it suggests the entity has ample short-term resources to cover short-term obligations. Hence, this statement is not correct.
Option c: 'Low liquidity ratios are not desirable.' Generally, low liquidity ratios imply potential difficulty in meeting short-term obligations, so they are undesirable for most firms. This statement is correct.
Option d: 'Low liquidity ratios can indicate liquidity problems.' This is a direct description of what a low current ratio or quick ratio tends to signify, i.e., potential liquidity issues. This statement is correct.
In summary, among the four options, only option b presents a claim that contradicts the standard interpretation of liquidity ratios. All other statements align with conventional understanding of liquidity assessment.

MCD2150 Accounting for Managers - Trimester 2 - 2025

Which statement is not correct?

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Similar Questions

At the end of 2012, Delaney Company had a current ratio of 1.87, a quick ratio of 1.31, and working capital of $45,000. Its current assets consisted of cash, accounts receivable, and merchandise inventory. Calculate the amount of Delaney's current liabilities (rounded to 0 decimals):

If a firm buys inventories with cash, the quick ratio decreases, but the current ratio remains constant

_______ ratios measure the ability of an organization to pay its short-term debts.

What do liquidity ratios measure?

Which of the following actions would NOT affect the quick / liquid ratio of a firm?

Which of the following is not a measure of short-term liquidity?

The current ratio is a measure of:

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