Question

соліпру р олі. 11. Discuss why a firm's current ratio may differ from another in the same industry.

Answer 1

Answer-Current ratio is also known as Working capital ratio. It is liquidity ratio which measures a company's short term short term solvency position.Means a firm have a sufficient current assets to pay off its liabilities payable within a year. Current ratio can be computed by dividing total current assets/ total current liabilities.

Current Ratio= Current Assets

Current Liabilities

A ratio of 2:1 or higher may consider satisfactory for most of the firms. But some times higher current ratio may not be show true liquidity position of the business. Because a firm which is having higher current ratio may be consist a large portion of slow moving and obsolete inventories. On the other hand a firm having low current ratio may be able to due its current obligation when it becomes due as a large portion of its current assets may consist of highly liquid assets i.e. cash, bank balance, marketable securities and fast moving inventories.

A firm's current ratio may differ from another firm in the same industry because a firms' current assets may be differ from another firm which may be a cause of change in current ratio.

Example:

	Firm A	Firm B
Current Assets:
Cash	$50,000	$4,000
Accounts Receivable	$120,000	16,000
Prepaid Expenses	$10,000	$10,000
Inventory	$170,000	$340,000
Total Current Assets (A)	$350,000	$370,000
Total Current Liabilities (B)	$175,000	$200,000
Current Ratio (A/B)	2	1.85

   So we can show that if a firm's having different amount of current assets and liabilities than a firm current ratio may differ from another firm's current ratio in same industry.