Question

For several years, Flame Corporation has had a current ratio that was consistent with the other companies in its industry. For most recent year, Flame's current ratio was significantly higher than that of the industry. What is the best possible explanation for this situation

Answer 1

Answer: b. Flowers liquidity has improved

Explanation:

The Current ratio is calculated by dividing the current assets of a company by its current liabilities. The current assets represent the liquidity of the company as they comprise of assets like cash and marketable securities.

If the current ratio was to increase, it would mean that either the numerator (current assets) increased or the denominator (current liabilities) decreased or that both happened. There is an option for the liquidity increasing which is saying that the numerator increases so this is correct as it is in line with what could have happened.