Question 26.Q10: Information on Beta for the previous two years is given belo...
Information on Beta for the previous two years is given below.
Which of the following statements regarding Beta is/are correct?
1 Beta appears to have less 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
| 20X1 | 20X2 | |
| Quick ratio | 1.5:1 | 1.5:1 |
| Current ratio | 1.8:1 | 3:1 |
| Inventory turnover | 15 days | 27 days |
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 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.