Question

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes an average of _____ days to sell.

A) 30
B) 60
C) 90
D) 120

Answer 1

The quick ratio is better for liquidity measurement than the current ratio if inventory takes about 60 days to sell because inventory is less liquid during longer turnover periods. The correct answer is option B.

Step-by-step explanation:

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company’s inventory takes an average of 60 days to sell. A longer inventory turnover period can signal that inventory is less liquid, thus making the quick ratio, which excludes inventory from current assets, a better indicator of a company’s short-term solvency.

It particularly applies when inventory is high or takes a longer time to convert into cash, which is why an average of 60 days to sell inventory is a critical threshold.