What does a quick ratio better illustrate compared to the current ratio?

What does a quick ratio better illustrate compared to the current ratio?

• A. The ability to cover liabilities with total assets
• B. The ability to cover liabilities with liquid assets
• C. The net income in terms of sales
• D. The profitability of goods sold

Answer: (B)

The quick ratio, also known as the acid-test ratio, specifically measures a company's ability to meet its short-term obligations using its most liquid assets. Unlike the current ratio, which includes all current assets (such as inventory), the quick ratio excludes inventory and other less liquid assets. This makes the quick ratio a more conservative indicator of a company's short-term liquidity position, focusing on the assets that can be quickly converted to cash, such as cash itself, cash equivalents, and receivables. This distinction is essential because it provides a clearer picture of the financial health of a business in situations where immediate liquidity is required. It shows how well a company can cover its current liabilities in the event of an unforeseen financial hiccup, making it a critical measure for investors and creditors when assessing a company's short-term financial stability.

The quick ratio, also known as the acid-test ratio, specifically measures a company's ability to meet its short-term obligations using its most liquid assets. Unlike the current ratio, which includes all current assets (such as inventory), the quick ratio excludes inventory and other less liquid assets. This makes the quick ratio a more conservative indicator of a company's short-term liquidity position, focusing on the assets that can be quickly converted to cash, such as cash itself, cash equivalents, and receivables.

This distinction is essential because it provides a clearer picture of the financial health of a business in situations where immediate liquidity is required. It shows how well a company can cover its current liabilities in the event of an unforeseen financial hiccup, making it a critical measure for investors and creditors when assessing a company's short-term financial stability.