Because it includes only cash and short-term investments in the numerator, the current ratio is a more stringent measure of a firm's ability to pay current liabilities than the quick ratio.

Question

Quizplus · Accepted Answer

The statement is incorrect. The quick ratio is a more stringent measure of a firm's ability to pay current liabilities as it excludes inventory and other current assets that may be difficult to convert to cash quickly. The current ratio may include these assets in the numerator and therefore may overstate a firm's ability to meet its short-term obligations.

Because It Includes Only Cash and Short-Term Investments in the Numerator