LIQUIDITY RATIOS Flashcards
1
Q
LIQUIDITY RATIO 1
Current Ratio =
A
Current Assets / Current Liabilities
Current ratio = Current Assets / Current Liabilities
Indicates how well a company can cover its short-term liabilities with its short-term assets.
A ratio above 1 is generally favorable.
2
Q
Liquidity Ratio 2: Acid-Test Ratio
Quick Ratio (Acid-Test Ratio)=
A
Current Assets - Inventory / Current Liabilities
Quick Ration= Current Assets - Inventory / Current Liabilities
Excludes inventory as it’s less liquid. Useful for businesses where inventory takes time to convert into cash.
3
Q
What do liquidity ratios measure?
A
Liquidity ratios measure a company’s ability to meet its short-term bligations.
