Liquidity ratios

Question 1

what do liquidity ratios show

Answer 1

measure the ability of the company to meet its financial obligations as they mature using liquid (Cash and near cash) resources

Question 2

what are the liquidity ratios

Answer 2

1. working capital
2. current ratio
3. quick (Acid test)

Question 3

how do you calculate working capital

Answer 3

current assets / total assets

Question 4

how do you calculate current ratio

Answer 4

current assets / current liabilities

Question 5

how do you calculate the quick (acid test)

Answer 5

cash + marketable securities + A/R / current liabilities

Question 6

what does working capital show

Answer 6

measures the proportion of total assets invested in current assets
- demonstrates the company’s capital intensity and corporate liquidity

Question 7

what does current ratio show

Answer 7

measures the number of dollars current assets for each dollar of current liabilities

• estimates the capacity of the company to meet its financial obligations as they mature

Question 8

what does the ;quick (acid test) show

Answer 8

recognizes that inventories and other current assets may be less liquid and in some cases when they have to be liquidated quickly, can result in cash flows that are less than book value