Which statement is not correct?

Question

BlackTom AI · Accepted Answer

The prompt asks which statement is not correct, so I will evaluate each option for accuracy before identifying the incorrect one.
Option a: 'High liquidity ratios are not necessarily desirable.' This is a reasonable and commonly accepted point. Very high liquidity ratios can indicate that a company is holding too much current assets relative to current liabilities, which might suggest inefficiency in using assets to generate returns. Therefore, this statement is correct.
Option b: 'A current ratio of greater than 2:1 means that an entity does not have sufficient liquidity to pay its debts as they fall due.' This claim runs counter to the basic meaning of the current ratio. A ratio above 2:1 typically signals stronger liquidity, not insufficient liquidity; it suggests the entity has ample short-term resources to cover short-term obligations. Hence, this statement is not correct.
Option c: 'Low liquidity ratios are not desirable.' Generally, low liquidity ratios imply potential difficulty in meeting short-term obligations, so they are undesirable for most firms. This statement is correct.
Option d: 'Low liquidity ratios can indicate liquidity problems.' This is a direct description of what a low current ratio or quick ratio tends to signify, i.e., potential liquidity issues. This statement is correct.
In summary, among the four options, only option b presents a claim that contradicts the standard interpretation of liquidity ratios. All other statements align with conventional understanding of liquidity assessment.

Which statement is not correct?Single choice

Similar Questions

At the end of 2012, Delaney Company had a current ratio of 1.87, a quick ratio of 1.31, and working capital of $45,000. Its current assets consisted of cash, accounts receivable, and merchandise inventory. Calculate the amount of Delaney's current liabilities (rounded to 0 decimals):

If a firm buys inventories with cash, the quick ratio decreases, but the current ratio remains constant

_______ ratios measure the ability of an organization to pay its short-term debts.

What do liquidity ratios measure?

Which of the following actions would NOT affect the quick / liquid ratio of a firm?

Which of the following is not a measure of short-term liquidity?

The current ratio is a measure of:

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