CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

An analyst prepares common-size balance sheets for two companies operating in the same industry. The analyst notes that both companies had the same proportion of current liabilities, long-term liabilities, and shareholders' equity and the following ratios:

Ratio | Company 1 | Company 2
Current ratio | 2.0 | 2.0
Cash ratio | 0.3 | 0.3
Quick ratio | 0.5 | 0.8

The most reasonable conclusion is that, compared with Company 2, Company 1 had a ______
A. higher percentage of assets associated with inventory.
B. higher percentage of assets associated with accounts receivable.
C. lower percentage of assets associated with marketable securities.
Explanation: The current ratio includes inventory but the quick ratio does not. (Current ratio is higher than quick ratio and quick ratio is higher than cash ratio.) The quick ratio includes accounts receivable but the cash ratio does not. The denominator for all three ratios is current liabilities, which are the same proportion for both companies. The difference in ratios is therefore created by inventory and accounts receivable. Company 1 has the higher percentage of inventory because the difference between the current ratio and quick ratio is greater for that company. Company 2 has the higher percentage of accounts receivable because the difference between the quick ratio and the cash ratio is greater for Company 2.

User Contributed Comments 1

User Comment
nmech1984 amazing question. brilliant.
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