Understanding Liquidity Ratios: The Quick Ratio

The video tutorial covers the basics of ratio analysis, focusing on the quick ratio. It explains the importance of liquidity ratios in assessing a company's ability to meet short-term obligations. The tutorial compares the financial positions of two companies using quick ratios, highlighting the impact of inventory on liquidity. It concludes by emphasizing the importance of using ratios as a tool for business decisions and introduces the next topic, the cash ratio.

What financial issue is highlighted when a company has a large inventory pile-up?

• Higher employee salaries

• Blocked cash flow

• Improved cash flow

• Increased sales revenue

Why is the quick ratio considered more conservative than the current ratio?

• It considers long-term assets

• It excludes liabilities

• It focuses on assets convertible to cash within 90 days

• It includes all current assets

Which of the following is NOT considered a quick asset?

• Inventory

• Cash equivalents

• Accounts receivable

• Marketable securities

How is the quick ratio calculated?

• Total assets divided by total liabilities

• Current assets divided by quick liabilities

• Inventory divided by current liabilities

• Quick assets divided by current liabilities

What does a quick ratio of less than one indicate?

• Strong financial position

• Financial difficulty

• Excessive cash reserves

• High profitability

If a company has a quick ratio of 4.5, what does it signify?

• The company has excessive inventory

• The company has no quick assets

• The company is in financial distress

• The company can repay its current liabilities 4.5 times over

Why might a creditor prefer Company A over Company B based on quick ratio?

• Company B has a higher current ratio

• Company B has more cash

• Company A has a stronger quick ratio

• Company A has a higher inventory