Which of the following statements about liquidity ratios is true?
A) The lower the quick ratio relative to the current ratio, the safer a firm is in terms of liquidity.
B) The higher the current ratio, the more likely a firm is able to pay its short-term obligations.
C) The quick ratio is always between 0 and 1.
D) Higher leverage reduces the quick ratio.

Question

Quizplus · Accepted Answer

A higher current ratio indicates that a firm has more current assets relative to current liabilities, providing a greater ability to pay short-term obligations. The quick ratio, which measures a firm's ability to meet short-term obligations with its most liquid assets, does not necessarily need to be between 0 and 1 and is not directly affected by leverage. A lower quick ratio relative to the current ratio may indicate a riskier liquidity position, as it suggests that a larger portion of the firm's current assets are tied up in inventory or other less liquid assets.

Which of the Following Statements About Liquidity Ratios Is True