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CFA Level I · CFA Level I Exam · Working Capital and Liquidity

A firm's current liabilities are 80 million, of which 30 million are inventory-related payables. It holds cash of 12 million, marketable securities of 18 million, receivables of 30 million, and inventory of 40 million. The firm's quick ratio (cash, securities and receivables over current liabilities) and its liquidity position are most likely:

The quick ratio is 60 million divided by 80 million, which equals 0.75. Quick assets are cash 12, securities 18 and receivables 30. A ratio below one means quick assets cover less than all current liabilities, so the firm may need inventory conversion or other sources.

  1. A0.75, indicating its quick assets cover less than all current liabilitiesCorrect
  2. B0.75, indicating a strong buffer without needing any secondary sources
  3. C1.00, indicating its quick assets exactly match current liabilities

Explanation

Quick assets = 12 + 18 + 30 = 60 million. Dividing by current liabilities of 80 million gives 0.75. Because the ratio is below 1, quick assets cover only 75% of current liabilities, so the firm is not fully covered without inventory or other sources. The 1.00 option wrongly adds nothing valid; the second option misreads the 0.75.

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