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Question
To test the liquidity of a concern, which of the following ratios are useful?
I. Acid test ratio
II. Capital turnover ratio
III. Bad debts to sales ratio
IV. Inventory turnover ratio
Select the correct answer using the codes given.
To test the liquidity of a concern, which of the following ratios are useful?
I. Acid test ratio
II. Capital turnover ratio
III. Bad debts to sales ratio
IV. Inventory turnover ratio
Select the correct answer using the codes given.
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Solution
The correct option is B I and IV
The ability of the business to pay its stakeholders when it is due is known as liquidity. And the ratios used to calculate are known as liquidity ratios and are essentially short term in nature. The following are the type of liquidity ratios:- Current ratio
- Quick ratio or Acid test ratio
- Cash Ratio or Absolute liquidity ratio
- Net working capital ratio ( This can be further segregated into Inventory turnover ratio, Debtors turnover ratio and Creditors turnover ratio. So these 3 ratios can also be interpreted as liquidity ratios).
The ability of the business to pay its stakeholders when it is due is known as liquidity. And the ratios used to calculate are known as liquidity ratios and are essentially short term in nature. The following are the type of liquidity ratios:
- Current ratio
- Quick ratio or Acid test ratio
- Cash Ratio or Absolute liquidity ratio
- Net working capital ratio ( This can be further segregated into Inventory turnover ratio, Debtors turnover ratio and Creditors turnover ratio. So these 3 ratios can also be interpreted as liquidity ratios).
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