______ is a measure of liquidity which excludes ________.
A. Liquid Ratio
B. Current Ratio
C. Debt equity Ratio
D. Inventory
E. Debtor
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → A and D only.
Liquid Ratio is a measure of liquidity which excludes Inventory.
Liquid Ratio 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 it 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’.