Liquidity Ratios Flashcards
1
Q
Current ratio
A
Current assets/current liabilities
AKA: working capital ratio
Purpose: determine if ST assets are sufficient to cover ST liabilities
Typical values of the current ratio vary by industry and organization
Higher ratio doesn’t always mean good and low ratio doesn’t always mean bad
2
Q
Quick ratio
A
(current assets - prepaid exp - inventory)/current liabilities
AKA: acid test ratio
Refines the current ratio by only comparing most liquid current assets with current liabilities
Excludes assets that are harder to liquidate (ie. Inventory)
3
Q
Liquidity ratios
A
Measure companies ability to meet short-term obligations
