Liquidity Ratios: Understanding Their Significance

Key Concepts of Liquidity Ratios

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Question

Which of the following is/are true about liquidity ratios, all else equal?

I. The cash ratio increases as average receivables increase.

II. The quick ratio is a more conservative liquidity ratio than the current ratio.

III. Liquidity ratios decrease as total liabilities decrease.

Answers

Explanations

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A. B. C. D.

B

Receivables are not part of the cash ratio and hence, changes in receivables do not directly affect the cash ratio. The quick ratio does consider receivables in addition to cash and marketable securities but ignores all other current assets. Thus, it is more conservative than the current ratio.

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