Question

Liquidity ratios are used to measure a firm's ability to meet its obligations as they come due. Two of the most commonly used liquidity ratios are the: (1) Current ratio and (2) Quick, or acid test, ratio. The current ratio is the most commonly used measure of solvency. Its equation is: If a firm is having financial difficulty, it typically begins to pay its accounts payable more slowly and to borrow from the bank—both of which will increase its current causing a decline in the current ratio. The quick ratio is a measure of a firm's ability to pay off obligations without relying on the sale of , which are typically the least liquid of a firm's current assets. Its equation is:

Answer 1

Current Ratio = Current Asset / Current Liabilities

Quick Ratio = (Current Assets – Inventories) / Current Liabilities

Step-by-step explanation:

The Current Ratio is a liquidity measure that shows the ratio between current asset and current debt obligations. It tells how many dollars of current asset are per dollar of current debts, that gives an idea of the company`s ability to perform its debts.

The Quick Ratio is also a liquidity indicator that measures the capacity of a company, using its most liquid assets, to pay its current debt at maturity. The inventory, although it is a current asset, is not considered, since it cannot be converted into cash in a very short term.

The difference between the Quick Ratio and the Current Ratio, implies that while both are measures of the company's ability to pay its debts, the quick ratio also tells how much the company depends on its inventory to get that objective