Understanding Liquidity Ratios in Financial Analysis

Understanding Liquidity Ratios in Financial Analysis

Assessment

Interactive Video

Business

University

Hard

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The video tutorial explains liquidity in business, focusing on how quickly assets can be converted into cash to meet liabilities. It introduces liquidity ratios, particularly the current ratio, which compares current assets to current liabilities. An example calculation is provided, showing a healthy 8:1 ratio. The tutorial discusses the importance of balancing liquidity, aiming for a current ratio between 1 and 1.5. It also covers strategies for managing liquidity by adjusting assets and liabilities.

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7 questions

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1.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

What is the primary purpose of liquidity ratios in a business context?

To measure long-term profitability

To assess the ability to meet short-term liabilities

To evaluate employee performance

To determine market share

2.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

How is the current ratio calculated?

By dividing total liabilities by total assets

By dividing current assets by current liabilities

By subtracting liabilities from assets

By adding current assets and liabilities

3.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

In the example provided, what does a current ratio of 8 to 1 indicate?

The business is likely to face bankruptcy

The business has excess liquidity

The business is in a risky financial position

The business has insufficient liquidity

4.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

What is considered an ideal range for the current ratio?

Between 3 and 4

Between 2 and 3

Between 1 and 1.5

Between 0.5 and 1

5.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

What might be a consequence of having too much liquidity?

Increased risk of bankruptcy

Higher returns on investments

Excessive cash reserves with low returns

Inability to pay short-term debts

6.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Which strategy can help a business increase its liquidity?

Increasing long-term liabilities

Reducing current liabilities

Increasing fixed assets

Decreasing current assets

7.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Why is it important for a business to balance liquidity and profitability?

To ensure high employee satisfaction

To maximize shareholder returns while maintaining solvency

To increase market share

To reduce operational costs