question archive Which of the following ratios measures a firm's liquidity? Select one: a

Which of the following ratios measures a firm's liquidity? Select one: a

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Which of the following ratios measures a firm's liquidity?

Select one:

a. debt-equity ratio

b. acid test ratio

c. return on assets

d. fixed asset turnover ratio

 

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(b) acid test ratio

Acid test ratio is also known as the working capital ratio since it ignores assets such as inventory, which may be difficult to quickly liquidate.

The acid-test, or quick ratio, compares a company's most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debt.

 

Liquidity ratios are used to measure a debtor's capacity to meet its current debt obligations. Thus more liquid the assets are more safer will a business be to pay off its current debt obligations

Four commonly used liquidity ratios are

Current ratio, Acid test ratio, Cash ratio, and Operating cash flow ratio

Current ratio-Current liabilities. Thus more the value of the ratio the more comfortable is the business to pay off current debt obligations