A business has a current ratio of 0.8:1. Which statement best describes this situation?

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Question

A business has a current ratio of 0.8:1. Which statement best describes this situation?

Accepted Answer

The business cannot cover its short-term debts with its current assets — A current ratio below 1:1 (such as 0.8:1) means the business has fewer current assets than current liabilities and cannot fully cover its short-term debts, indicating a potential liquidity problem. Option A describes a ratio above 1:1. Option C describes a problem with inventory management but is not directly indicated by the current ratio alone. Option D describes a ratio that is too high (typically above 2:1).

Answer

The business holds too much inventory and should reduce its stock levels

Answer

The business has excessive liquidity and is using assets inefficiently

Answer

The business cannot cover its short-term debts with its current assets

Answer

The business has more current assets than current liabilities and is highly liquid

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