Liquidity Ratios Quiz

Why are liquidity ratios used in business?

• To measure long-term financial obligations

• To assess the ability to meet short-term financial obligations

• To calculate profit margins

• To analyze market trends

How is the current ratio calculated?

• Dividing inventory by current assets

• Dividing current assets by current liabilities

• Dividing total assets by total liabilities

• Dividing current assets by long-term liabilities

What does a current ratio of 1.25 to 1 indicate?

• The business is in a healthy shape

• The business is facing liquidity problems

• The business is over-invested

• The business is insolvent

Why is the liquid capital ratio considered a good indicator of true liquidity?

• It includes all assets of the business

• It considers future market trends

• It excludes inventory which may not be easily convertible to cash

• It focuses only on long-term investments

What does a liquid capital ratio of 0.39 to 1 indicate?

• The business is profitable

• The business is highly liquid

• The business is facing liquidity problems

• The business is under-invested

How can liquidity ratios be used for comparison and analysis?

• To assess long-term investments

• To compare profitability with competitors

• To predict future market trends

• To investigate liquidity trends year on year

What is the significance of a current ratio below 1?

• The business is facing liquidity problems

• The business is insolvent

• The business is under-invested

• The business is highly profitable

Why is it important to exclude inventory from the liquid capital ratio calculation?

• Inventory is a long-term asset

• Inventory may not be easily convertible to cash

• Inventory is a liquid asset

• Inventory has no impact on liquidity

What action should a business take if its current ratio is below 1?

• Expand inventory holdings

• Reduce current assets

• Increase long-term investments

• Implement financial management measures

What is the purpose of comparing liquidity ratios with competitors?

• To assess market trends

• To copy their financial strategies

• To identify strengths and weaknesses

• To predict future profits