Question

Measuring firm’s liquidity by using current asset (excluding inventories) divided with current liabilities:Measuring firm’s liquidity by using current asset (excluding inventories) divided with current liabilities:
Select one:
a. Current ratio
b. Interval measures
c. Cash ratio
d. NWC total assets
e. Quick ratio

Answer 1

We know that

Quick Ratio = ( Current Assets - Stock ) / Current liabilities

Quick Ratio is an indicator of short term liquidity position and measures the company ability to meet its short term obligations with its most liquid Assets.

Since inventory is not considered as the most liquid asset so it is excluded from the Current Assets

Quick ratio measures firms liquidity by using current assets ( Excluding stock) divided with the Current liabilities.Hence option e ) is correct

Expaining why other answers are not correct.

a) Current ratio

We know that Current ratio = Current Assets / Current liabilities

* Since in the Current Assets inventory is also included so option a) is not correct.

b) interval measures.

We know that Interval measure = ( Current Assets- Inventories ) /Daily operating Expenses

Since Current Assets excluding stockmis not divided by Current liablities so option b ) is not correct.

c) Cash ratio

We know that Cash ratio = ( Cash and Bank Balance + Marketabe securities) / Current liabilities

* All the Current assets are not taken into picture so option c is not correct.

d) NWC Total assets

NWC Total Assets = ( Current Assets - Current liabilities ) /Total Assets

Option d) is not the correct answers.

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