If a firm’s current ratio is increasing, it is likely that…

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BlackTom AI · Accepted Answer

When assessing changes in the current ratio, different implications about a firm's short-term financial health arise, so each option warrants careful evaluation.
Option 1: 'The firm is becoming less efficient' — Efficiency relates to how well assets and resources are utilized, not directly to liquidity measures like the current ratio. A rising current ratio does not inherently indicate reduced efficiency; it could result from rising current assets or falling current liabilities, regardless of operating efficiency.
Option 2: 'The firm is becoming more liquid' — This is the core interpretation. The current ratio = current assets / current liabilities; an increase typically signals greater ability to cover short-term obligations, i.e., improved liquidity, assuming the components aren’t distorted by unusual one-time items.
Option 3: 'The firm is becoming less liquid' — This contradicts the meaning of an increasing current ratio. If liquidity were worsening, the current ratio would tend to fall, not rise, so this statement is inconsistent with the metric.
Option 4: 'The firm is becoming more efficient' — While liquidity and efficiency can be related in some contexts, the current ratio measures liquidity, not operational efficiency. An increasing ratio does not automatically imply improved efficiency in how assets are used to generate revenue.
In summary, an increasing current ratio most directly points to enhanced short-term liquidity, while the other choices misinterpret what a higher current ratio signifies or confuse liquidity with efficiency.

MSB-250-300-002 Proctored Final Exam

If a firm’s current ratio is increasing, it is likely that…

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