I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

QUESTION 

Interpreting information VI

 

Information on Beta for the previous two years is given below.  

 20X1 

20X2 

Quick ratio 

1.5:1 

1.5:1 

Current ratio 

1.8:1 

3:1 

Inventory turnover  

15 days 

27 days 

Which of the following statements regarding Beta is/are correct? 

1 

Beta appears to have fewer inventories in 20X2 than in 20X1. 

2 

The debt position of Beta is worsening. 

3 

Stock obsolescence could be a problem for Beta. 

A 1 

only 

B 

1 and 3 only 

C 3 

only 

D 

2 and 3 only 

ANSWER 

C 

The current ratio measures the ratio of current assets to current liabilities, whereas the quick ratio 

measures current assets less inventories compared to current liabilities. Because the quick ratio 

has stayed the same, the increase in the current ratio must have been caused by an increase, 

rather than a decrease, in the amount of inventories held. The significant increase in the inventory 

turnover period suggests that stock obsolescence could be an issue for Beta. This could also be 

the reason why the current ratio has increased. The information given does not allow any insight 

into the debt position of Beta.