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Q.

The current ratio of a company is 2:1. This means that:

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a

The company is highly illiquid

b

The company has low current liabilities

c

The company is highly liquid

d

None of the above

answer is A.

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Detailed Solution

A current ratio of 2:1 indicates that the company has twice as many current assets as it
has current liabilities, making it highly liquid. Generally, a current ratio of 2:1 is considered a good ratio, as it indicates that the company has enough current assets to cover its current liabilities. This means that the company can use its current assets to pay off its short-term obligations, such as accounts payable, within a year.

However, it is important to note that the current ratio alone does not provide a complete picture of a company's financial health. Other factors such as cash flow, debt levels, and profitability should also be taken into account when evaluating a company's overall liquidity position.

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The current ratio of a company is 2:1. This means that: