The liquidity of a firm is
A)often measured by a ratio of current assets to current liabilities.
B)not important to a company's financial health.
C)the ability of the firm to sell its products quickly.
D)a measurement of spontaneous financing.

Question

Quizplus · Accepted Answer

Liquidity refers to the ability of a company to pay its short-term debts and obligations as and when they become due. The most common way to measure liquidity is by calculating the current ratio, which is the ratio of current assets (like cash, accounts receivable, and inventory) to current liabilities (like accounts payable and short-term borrowings). A higher current ratio indicates better liquidity. Therefore, option A is the correct answer. Option B is incorrect because liquidity is essential to a company's financial health. Option C is incorrect because it is a misinterpretation of what liquidity means. Option D is incorrect because spontaneous financing refers to financing that arises naturally from a company's operations, and it has nothing to do with liquidity.

The Liquidity of a Firm Is