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Briefly explain the liquidity ratio and what function it has in terms of fiscal management. Q15

Briefly explain the liquidity ratio and what function it has in terms of fiscal management. Q15

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Liquidity ratio helps in understanding the companies capability to pay off its short term obligations. The ratios required to measure liquidity are current ratio, quick ratio and cash ratio.Current ratio is ratio of current assets to current liabilities , quick ratio is current assets minus inventory divided by current liabilities. This ratio measure how must current debt can be paid off without using inventory. Cash ratio is the cash to current liabilities ratio. It measures the capability of cash to meet short term liabilities.

Liquidity ratios help in understanding the liquidity of the firm . If current ratio is greater than 1 then liquidity in firm is high and if quick ratio is high then the liquidity of the firm is better even after neglecting inventory . If these ratio are lower than reducing the current liabilities and increasing current assets should be increased. Increasing cash is best it manages all the current liabilities.


jeff jeffy answered 1 year ago
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