Liquidity Ratios

What does liquidity measure in a business?

• The ability to generate profit

• The ability to raise cash

• The ability to expand operations

• The ability to reduce costs

Answer explanation

Liquidity in a business measures the ability to raise cash, not generate profit, expand operations, or reduce costs.

What is the ideal current ratio for a business?

• 1:1

• 2:1

• 3:1

• 1:2

Answer explanation

The ideal current ratio for a business is 2:1, indicating that the business has twice as many current assets as current liabilities, ensuring liquidity and financial stability.

What does a current ratio of 1:1 indicate about a business?

• The business is highly efficient

• The business may not be able to meet its debts quickly

• The business has too much money tied up in stock

Answer explanation

A current ratio of 1:1 indicates that the business may not be able to meet its debts quickly.

What does the acid test ratio exclude from its calculation?

• Cash

• Debts

• Stock

• Short-term creditors

Answer explanation

The acid test ratio excludes Stock from its calculation, focusing on more liquid assets to assess short-term liquidity.

Why is stock excluded from the acid test ratio?

• It is always perishable

• It may go out of date or fashion

• It is not a current asset

• It is always obsolete

Answer explanation

Stock is excluded from the acid test ratio because it may go out of date or fashion, making it less liquid and reliable for immediate cash needs.

What is the generally accepted ideal value for the liquid capital ratio?

• 1:1

• 2:1

• 3:1

• 1.5:1

Answer explanation

The generally accepted ideal value for the liquid capital ratio is 1:1, meaning that the liquid assets are equal to the current liabilities.

What does a high current ratio indicate about a business?

• The business is highly efficient

• The business has too much money tied up in current assets

• The business is not profitable

Answer explanation

A high current ratio indicates that the business has too much money tied up in current assets, which may not be efficiently utilized.

Which of the following is a measure of a company's short-term liquidity?

• Gross Profit Margin

• Current ratio

• Net Profit Margin

Answer explanation

The correct measure of a company's short-term liquidity is the Current ratio, which assesses the company's ability to pay off its short-term liabilities with its short-term assets.

Why is the acid test ratio considered more stringent than the current ratio?

• It includes stock in its calculation

• It excludes stock from its calculation

• It includes long-term assets

• It excludes cash from its calculation

Answer explanation

The quick ratio is more stringent than the current ratio because it excludes stock from its calculation, focusing only on the most liquid assets.