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There are two firms, UNO Inc. and DOS Co., in the same industry. One of the firms, UNO, has a higher and increasing current ratio.

  1. There are two firms, UNO Inc. and DOS Co., in the same industry. One of the firms, UNO, has a higher and increasing current ratio. UNO also has a low and falling inventory turnover and a very high and increasing average collection period.(Note: DOS has a stable current ratio and inventory turnover, and long but stable average collection period). Both firms have very little cash. The data for UNO and DOS can be summarized as:

Company

Current Ratio

Ave. Collection Period

Inventory Turnover

Cash

UNO

Higher; increasing

Very long; increasing

Low and falling

little

DOS

Lower; stable

Long; Stable

Higher

little

Which of the following statements about the relative liquidity of the firms is most plausable?

  • UNO has better liquidity because of better inventory management
  • DOS has lower liquidity because the higher inventory turnover ratio likely means the firm is holding unsalable inventory
  • UNO has better liquidity as evidenced by the higher current ratio
  • DOS has better liquidity because the current ratio is more stable
  • UNO has lower liquidity as the higher current ratio likely results from the build up of low quality current assets

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