Which ratio measures a company's ability to meet present obligations from its liquid assets?

Which ratio measures a company's ability to meet present obligations from its liquid assets?

• A. Debt Ratio
• B. Current Ratio
• C. Quick Ratio
• D. Accounts Payable Ratio

Answer: (B)

Liquidity is about a company’s ability to cover short-term obligations with assets it can quickly convert to cash. The current ratio expresses this by comparing all current assets to current liabilities, showing how many dollars of near-term resources are available for each dollar of short-term debt. A higher current ratio indicates more cushion to meet obligations as they come due. If the focus were strictly on the most liquid items, the quick ratio would be used, since it excludes inventory and uses only cash, marketable securities, and receivables. The debt ratio looks at leverage rather than immediate liquidity, and accounts payable ratio is not a standard measure of a company’s ability to meet near-term obligations from liquid assets.

Liquidity is about a company’s ability to cover short-term obligations with assets it can quickly convert to cash. The current ratio expresses this by comparing all current assets to current liabilities, showing how many dollars of near-term resources are available for each dollar of short-term debt. A higher current ratio indicates more cushion to meet obligations as they come due. If the focus were strictly on the most liquid items, the quick ratio would be used, since it excludes inventory and uses only cash, marketable securities, and receivables. The debt ratio looks at leverage rather than immediate liquidity, and accounts payable ratio is not a standard measure of a company’s ability to meet near-term obligations from liquid assets.