Answer:
Current Ratio
Liquid Ratio
Definition
The Current Ratio is the ratio between the Current Assets and the Current Liabilities of a company.
The Liquid Ratio is the ratio between the Liquid Assets and the Current Liabilities of a company.
Purpose
The Current Ratio helps the firm assess its capability to meet any short-term obligations that may arise while conducting business.
The Liquid Ratio helps a firm assess its capability to meet any urgent requirements for cash that may arise while conducting business.
Current Assets
The Current Ratio includes all the Current Assets of the business.
The Liquid Ratio includes only those Current Assets that the firm can liquidate to cash within the next ninety days.
Inventory
The Current Ratio includes the inventory stock of a firm.
The Liquid Ratio excludes the inventory stock of a firm.
Ideal Ratio
Although anything more than 1 is the ideal scenario for a company, a Current Ratio of 2:1 is preferable.
The ideal Liquid Ratio for a company is more than 1.
Approach for Paying Debt
The Current Ratio is a much more relaxed method of finding out whether a company can repay its creditors in case of an emergency.
The Liquid Ratio is a much more stringent method of finding out whether a company can repay its creditors in case of an emergency.
Comparison
The Current Ratio will be naturally higher for a company that has a higher stock of inventory.
The Quick Ratio will be naturally lower for a company that has a higher stock of inventory.