- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 22. Understanding Balance Sheets
- Subject 5. Uses and Analysis of the Balance Sheet

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**CFA Practice Question**

Which of the following statements about the current ratio is accurate?

A. Use of book values in the calculation of this ratio is unacceptable because the market values of these assets and liabilities tend to deviate from book values.

B. It will always be greater than the quick ratio in companies that carry inventory.

C. The higher the current ratio the higher the level of cash in a firm.

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**User Contributed Comments**
5

User |
Comment |
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dealsoutlook |
how is it right? Current ratio = CA/CL and CA includes Inventories whereas quick ratio excludes inventory so Current Ratio should be lower than Quick ratio |

thanks |
dealsoutlook, ur arguement is correct but ur conclusion is not. Since Current ratio includes inventories, it will have a higher numerator value than quick ratio. Therefore, the current ratio will always be greater than quick ratio. (eg. cash + marketable securities + acct receivables = 100, and inventory = 10, and liabilities = 200, then current ratio = 110/200, and quick ratio = 100/200) |

monteleone |
Here is the rule: current ratio > quick ratio > cash ratio. The cash ratio is the most conservative ratio of the three. |

padasalasunil |
@monteleone Thanks! nice info! |

GBolt93 |
@monteleone: Those should all be >= . If case there is no AR or INV, current ratio=quick ratio=cash ratio |