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ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements

Bellmont Co has a current ratio of 1.8 and an inventory holding period of 95 days, whereas the industry averages are 1.5 and 60 days respectively. Which conclusion is best supported by this information alone?

The best-supported conclusion is that Bellmont looks more liquid than the industry on the current ratio, but a good part of that liquidity is held in slow-moving inventory, as shown by 95 days against 60. The ratios give no direct evidence about profitability.

  1. AThe company is more liquid than average, but part of its current assets is tied up in slow-moving inventoryCorrect
  2. BThe company is less liquid than average because its inventory days are high
  3. CThe company is more profitable than the industry average
  4. DThe company is managing working capital more efficiently than the industry

Explanation

A current ratio of 1.8 against 1.5 indicates higher liquidity than the industry. However, 95 inventory days against 60 suggests that inventory is held longer, so the liquidity is partly due to inventory build-up. Neither ratio says anything about profitability.

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