_______________________ is a measure of liquidity which excludes ________________( the least liquid asset) of the company.
Answer & explanation
Correct answer: option 4
The correct answer is option 4- Liquid ratio, inventory.
Liquid ratio is a measure of liquidity which excludes inventory ( the least liquid asset) of the company.
Quick or Liquid Ratio = It is the ratio of quick (or liquid) asset to current liabilities. It is expressed as Quick ratio = Quick Assets/Current Liabilities.
The quick assets are defined as those assets which are quickly convertible into cash. While calculating quick assets we exclude the inventories at the end and other current assets such as prepaid expenses, advance tax, etc., from the current assets.
Because of exclusion of non-liquid current assets liquid ratio is considered better than current ratio as a measure of liquidity position of the business. It is calculated to serve as a supplementary check on liquidity position of the business and is therefore, also known as ‘Acid-Test Ratio’.