Question

Liquidity ratios indicate a company's:

A. ability to pay short-term debts.

B. ability to generate a financial return on sales.

C. relative amounts of funds supplied by creditors.

D. ability to meet its long-term financial obligations.

E. profitability and leverage ratios.

Answer 1

Liquidity ratios indicate a company's ability to pay short-term debts by measuring its ability to convert current assets into cash.

Step-by-step explanation:

Liquidity ratios indicate a company's ability to pay short-term debts. These ratios measure the company's ability to convert its current assets, such as cash and accounts receivable, into cash to meet its short-term obligations. One commonly used liquidity ratio is the current ratio, which is calculated by dividing current assets by current liabilities.

For example, if a company has current assets of $100,000 and current liabilities of $50,000, its current ratio would be 2:1. This means that the company has $2 of current assets for every $1 of current liabilities, indicating a strong ability to pay off short-term debts.