Financial statement ratio - liquidity ratios

Question 1

Liquidity ratios

Answer 1

Measure of a firm’s short-term ability to meet its current obligations:

• Current ratio
• Quick ratio (acid test)

The current & quick ratios gauge the ability of a company to cover short term financing needs.
• Rough rule of thumb: A current ratio > 1 is good. It implies that there are more liquid assets than short term liabilities, reflecting a healthier level of liquidity.
The flip side is that companies with very strong working capital management can operate effectively with lower liquidity ratios, enabling them fund activities more efficiently

Question 2

Current ratio

Answer 2

Current assets / current liabilities

Question 3

Quick ratio (acid test)

Answer 3

Cash and AR / current liabilities