Liquidity Ratios and Financial Analysis

This video tutorial explains liquidity ratios, focusing on the current and quick ratios. It describes how these ratios measure a company's ability to meet short-term financial obligations. The current ratio compares current assets to current liabilities, with a value above one indicating good financial health. The quick ratio, a more stringent measure, excludes inventory and prepaid expenses from assets. Practical examples illustrate how to calculate both ratios, emphasizing the importance of having a ratio above one for financial stability.

What is the primary purpose of liquidity ratios?

• To assess a company's ability to meet short-term obligations

• To measure a company's long-term profitability

• To determine a company's growth potential

• To evaluate a company's market share

If a company's current ratio is greater than one, what does it indicate?

• The company's assets exceed its liabilities

• The company is not profitable

• The company has more liabilities than assets

• The company is in financial distress

In the example comparing Company A and Company B, what was the current ratio of Company A?

• 0.5

• 1.0

• 2.0

• 1.5

What is the current ratio of a company with 500 million in current assets and 300 million in current liabilities?

• 1.5

• 2.0

• 0.5

• 1.67

What distinguishes the quick ratio from the current ratio?

• The quick ratio is always higher than the current ratio

• The quick ratio is only used for long-term obligations

• The quick ratio excludes inventory and prepaid expenses

• The quick ratio includes inventory in its calculation

Why is inventory not considered a liquid asset in the quick ratio?

• It cannot be sold quickly

• It may need to be sold at a discount

• It is always sold at a premium

• It is not part of current assets

Calculate the quick ratio for a company with 500 million in current assets, 50 million in inventory, 30 million in prepaid expenses, and 300 million in current liabilities.

• 1.6

• 1.0

• 1.2

• 1.4

What is the quick ratio of a company with 700 million in liquid assets and 280 million in current liabilities?

• 3.0

• 2.5

• 1.5

• 2.0

Which of the following is considered a liquid asset in the quick ratio calculation?

• Long-term investments

• Accounts receivable

• Prepaid expenses

• Inventory

What does a quick ratio greater than one signify?

• The company has insufficient liquid assets

• The company is not profitable

• The company can meet its short-term obligations

• The company is over-leveraged