Intermediate Accounting (16th Edition)

Published by Wiley
ISBN 10: 1118743202
ISBN 13: 978-1-11874-320-1

Chapter 5 - Balance Sheet and Statement of Cash Flows - Review and Practice - Questions - Page 237: 5


Ideally, an increase in inventories normally results to an increase in the current assets which is usually the numerator of the current ratio and thus an increase in inventories will ultimately increase the current ratio. In general, an increase in the current ration will definitely translate to the fact that a company has better liquidity since there are more current assets relative to current liabilities.

Work Step by Step

Its important to note that, when inventories increase faster than the sales, thing may not be a thing or rather signal concerning the liquidity of a company. That is, inventories can only be used to meet current/short-term obligations when sold and converted into cash.
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