Liquidity Ratios

Question 1

Current Ratio or
Working Capital Ratio
or Banker’s Ratio

Test of short-term paying ability.
Measures a rough estimate on the
ability of the business to meet its
currently maturing obligations; this
ratio varies in great disparity from
one industry to another.

Answer 1

Current Assets/Current Liabilities

Question 2

Acid Test or Quick
Ratio

Measure the firm’s ability to pay its
short-term debts from its most
liquid assets without having to rely on inventory.
A more severe test of immediate
liquidity to meet currently maturing
obligations; quick assets include
cash, marketable securities and
receivables, this ratio is also
referred to as acid-test ratio.

Answer 2

Quick Assets/Current Liabilities

Question 3

Cash Flow Ratio

Shows the significance of cash
flow for setting current obligations
as they become due.

Answer 3

Operating Cash Flow/
Current Liabilities

Question 4

Cash Ratio

A more conservative variation in
Quick Ratio. It tests short-term
liquidity without having to rely on
receivables and inventory.

Answer 4

Cash + Cash Equivalents + Marketable
Securities/
Current Liabilities

Question 5

Defensive Interval

Reflects the percentage of near
cash items to the daily operating
cash flow.

Answer 5

Cash Equivalent
+ Net Receivables + Marketable
Securities
/Daily Operating Cash Flow

Question 6

Cash to Current
Assets Ratio

Measures the liquidity of current
assets.

Answer 6

Cash + Cash Equivalent + Marketable
Securities
/Current Assets