The correct answer is option 3- Both Assertion (A) and Reason (R) are not correct.
Assertion (A): Long-term financial position of a firm is assessed from Liquidity Ratios. This is false as long term financial position is measured through solvency ratios.
Reason (R): Liquidity Ratios, i.e., Current Ratio and Quick Ratio help in assessing the Long-term financial position of the firm. This is false as these ratios helps in measuring in short term liquidity position.
Liquidity ratios are financial metrics that measure a company's ability to meet its short-term financial obligations promptly. They provide insights into the company's liquidity position and its ability to convert assets into cash to pay off short-term debts. The two most commonly used liquidity ratios are the Current Ratio and the Quick Ratio (also known as the Acid-Test Ratio).
Current Ratio = Current Assets / Current Liabilities. This ratio measures the company's ability to pay off its current liabilities with its current assets. A Current Ratio greater than 1 indicates that the company has sufficient current assets to cover its current liabilities, which is considered a healthy liquidity position. The ideal ratio is 2:1.
Quick Ratio = (Current Assets - Inventory) / Current Liabilities. The Quick Ratio provides a more conservative measure of liquidity, as it excludes inventory, which may not be easily converted into cash in the short term. A Quick Ratio greater than 1 suggests that the company can meet its short-term obligations without relying on selling inventory. The ideal ratio is 1:1.
Both the Current Ratio and Quick Ratio are important tools for assessing a company's ability to meet its short-term financial obligations, and they are commonly used by investors, creditors, and management to evaluate the company's liquidity position and financial health.
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