The table below shows two liquidity ratios calculated for Savanna Ltd for the past two years: multicolumn(1)(|c|)( Ratio ) & 2022 & 2021 Current ratio & 1.8: & 1.7: & 1 & 1 Quick (acid) & 0.7: & 0.9: & 1 & 1 Which of the following statements is an incorrect interpretation of these ratios In 2022, for every £ 1 of current liabilities, the company has £ 1.8 of current assets and £ 0.70 of liquid assets. The decline in the acid-test ratio is not worrying as the higher current ratio means that the company has more liquid assets in 2022. Short-term lenders and suppliers may become anxious by the decline in quick ratio, which could lead them to press for their payments. The low quick ratio in both years is a cause of concern as it signals liquidity issues in the business. There is no ideal current ratio that fits all businesses, different types of businesses in different sectors may require different current ratios.

Question

The table below shows two liquidity ratios calculated for Savanna Ltd for the past two years: multicolumn(1)(|c|)( Ratio ) & 2022 & 2021 Current ratio & 1.8: & 1.7: & 1 & 1 Quick (acid) & 0.7: & 0.9: & 1 & 1 Which of the following statements is an incorrect interpretation of these ratios In 2022, for every £ 1 of current liabilities, the company has £ 1.8 of current assets and £ 0.70 of liquid assets. The decline in the acid-test ratio is not worrying as the higher current ratio means that the company has more liquid assets in 2022. Short-term lenders and suppliers may become anxious by the decline in quick ratio, which could lead them to press for their payments. The low quick ratio in both years is a cause of concern as it signals liquidity issues in the business. There is no ideal current ratio that fits all businesses, different types of businesses in different sectors may require different current ratios.

Answer 1

The incorrect interpretation is the statement that "The decline in the acid-test ratio is not worrying as the higher current ratio means that the company has more liquid assets in 2022".

Answer 2

## Step1: In the given data, we have liquidity ratios calculated for Savanna Ltd for 2022 and 2021. Specifically, we have current ratios and quick (acid-test) ratios for both years. ## Step2:Current ratio is a logical● interpretation and essentially shows liquidity pertaining to a company's current assets that could be sufficient enough to cover its current liabilities. The quick (acid) ratio goes a step further in factoring the liquidity of a company closer towards immediate scenarios since it sometimes fails to include inventories and prepayments. ## Step3:Let's analyze each presented opinion:Option 1: This resonates well with the definition of current ratio and it correctly refers to the table above for 2022 year. This is a correct statement. Option 2: Although the Current Ratio in year 2022 is higher indicating a better ability to pay off Current liabilities with Current assets, non-deduction of inventories and prepayments can falsely enhance liqudity status. Plus, Acid test ratio also lowered from 0.9 to 0.7 experiening decline in liqudity. This statement isn’t true.Option 3: Sound interpretation as a declining quick ratio could ignite short-term creditors and suppliers to hurry up on their payment solicitation. The lower quick ratios suggest possiblehift difficulty with paying off current liabilities, excluded inventory and prepayments.Option 4: A low quick ratio, accessible across both years signifies liquidity problems, a good interpretation closely reflecting business reality. Current assets aren't essentially more accessible,quick to pay off current liabilities. With declining value from 0.9-0.7 the liquidity needs seem higher.Option 5: Current ratios connect to business sectors and varied niches differently as sectors each have variable capitals utilized differently. Characterizing this relativity factor correctly isn't untrue as it actually trueonor to owning defining specifics per sectors.

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