Question

Consider the following :
i)Basic defensive and interval ratio
ii)Current ratio
iii)Superquick ratio
iv)Quick ratio
Arrange these ratios in sequence to reflect the liquidity in descending order.

• A. (ii), (iv), (iii) and (i)
• B. (i), (ii), (iv) and (iii)
• C. (iv), (ii), (iii) and (i)
• D. (iii), (iv),(i) and (ii)

Answer 1

The correct option is A (ii), (iv), (iii) and (i)

1. Current ratio = Current assets/Current liabilities
   
2. Quick ratio = [Current assets minus inventory]/ Current liabilities
   
3. Super quick ratio = [Cash + Marketable securities]/ Current liabilities
   
4. Basic defensive and interval ratio = [Cash + Marketable securities + Trade receivables] / Average daily expenditures

As we move from ratio number $1$ to ratio number $4$ we are calculating the liquidity on more and more conservative basis as it can be seen that as we move from ratios $1$ to $3$ we are considering few and fewer assets and in the $4$th ratio we are considering average daily expenditures instead of the whole of current liabilities as this ratio helps us to understand that for how many days can the company survive without having to liquidate its long term assets.