Define the current ratio and quick ratio and what they measure.

Define the current ratio and quick ratio and what they measure.

• A. Current ratio = Net Income / Current Liabilities; Quick ratio = (Cash + Accounts Receivable + Marketable Securities) / Current Liabilities; measure liquidity.
• B. Current ratio = Total Assets / Total Liabilities; Quick ratio = Net Income / Current Assets.
• C. Current ratio = Cash / Liabilities; Quick ratio = Accounts Receivable / Liabilities.
• D. Current ratio = Current Assets / Current Liabilities; Quick ratio = (Cash + Accounts Receivable + Marketable Securities) / Current Liabilities; measure liquidity.

Answer: (D)

These ratios assess liquidity—the ability to cover short-term obligations with assets that can be turned into cash quickly. The current ratio compares all current assets to current liabilities, giving a broad view of how much cushion a company has to meet its near-term debts. The quick ratio tightens this by excluding inventory, since inventory isn’t as readily sold for cash; it uses only cash, accounts receivable, and marketable securities, divided by current liabilities. Because it excludes inventory, the quick ratio provides a stricter test of short-term liquidity. Other formulations mix profitability or total size into the measure, which doesn’t directly reflect the ability to cover short-term obligations.

These ratios assess liquidity—the ability to cover short-term obligations with assets that can be turned into cash quickly. The current ratio compares all current assets to current liabilities, giving a broad view of how much cushion a company has to meet its near-term debts. The quick ratio tightens this by excluding inventory, since inventory isn’t as readily sold for cash; it uses only cash, accounts receivable, and marketable securities, divided by current liabilities. Because it excludes inventory, the quick ratio provides a stricter test of short-term liquidity. Other formulations mix profitability or total size into the measure, which doesn’t directly reflect the ability to cover short-term obligations.