Question

Liquidity ratios are used to measure a firm's ability to meet its obligations as they come due. Two of the most commonly used liquidity ratios are the: (1) Current ratio and (2) Quick, or acid test, ratio. The current ratio is the most commonly used measure of solvency. Its equation is:______.
If a firm is having financial difficulty, it typically begins to pay its accounts payable more slowly and to borrow from the bank—both of which will increase its current causing a decline in the current ratio. The quick ratio is a measure of a firm's ability to pay off obligations without relying on the sale of, which are typically the least liquid of a firm's current assets. Its equation is:________.

Answer 1

Explanation:

The equation of the current ratio is shown below:

Current ratio = Total Current assets ÷ total current liabilities

It shows a relationship between the total current assets and the total current liabilities and it is always expressed in times

And, the equation of the quick ratio is shown below:

Quick ratio = Quick assets ÷ total current liabilities

where,

Quick assets = Cash and cash equivalents + short-term investments + Accounts receivable (net)

It is also always expressed in times. Moreover, the inventory is the least liquid  firm current assets