Which ratio measures liquidity using only the most liquid current assets (cash and receivables)?

Which ratio measures liquidity using only the most liquid current assets (cash and receivables)?

• A. Quick Ratio
• B. Current Ratio
• C. Debt-to-Equity
• D. Asset Turnover

Answer: (A)

Liquidity analysis uses the quick ratio to focus on the most liquid current assets. By using cash and accounts receivable (and sometimes marketable securities) in relation to current liabilities, it provides a strict measure of how quickly a company can meet short-term obligations. Inventory is excluded because it may not be readily converted to cash, making the quick ratio a tighter test of short-term financial health. The current ratio includes all current assets, so it’s less strict. Debt-to-equity is about financing structure, not liquidity, and asset turnover measures how efficiently assets generate sales, not the ability to cover short-term obligations.

Liquidity analysis uses the quick ratio to focus on the most liquid current assets. By using cash and accounts receivable (and sometimes marketable securities) in relation to current liabilities, it provides a strict measure of how quickly a company can meet short-term obligations. Inventory is excluded because it may not be readily converted to cash, making the quick ratio a tighter test of short-term financial health. The current ratio includes all current assets, so it’s less strict. Debt-to-equity is about financing structure, not liquidity, and asset turnover measures how efficiently assets generate sales, not the ability to cover short-term obligations.