Question

A combination of high level of current assets with low level of current liabilities will generally...

A combination of high level of current assets with low level of current liabilities will generally yield the following results

A. Lower profitability and lower risk

B. Lower profitability and higher risk

C. Higher profitability and higher risk

D. Higher profitability and lower risk

E. None of the above

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Answer #1

A. Lower profitability and lower risk

The profits will be lower because greater capital is blocked in the current assets. The current liabilities are lower which means that greater current assets are available for lesser current liabilities. This increases the liquidity and lowers the risk of default by the company.

Option B is incorrect since the risk is lower and not higher. C and D are false since the profits are not higher due to greater working capital invested in the company. E is invalid since A is true.

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