Which ratio excludes inventory when assessing liquidity?

Which ratio excludes inventory when assessing liquidity?

• A. Current ratio
• B. Quick ratio
• C. Debt-to-equity ratio
• D. Asset turnover

Answer: (B)

Assessing liquidity focuses on how easily a firm can meet short-term obligations. The quick ratio does this using only the most liquid assets—cash, marketable securities, and accounts receivable—divided by current liabilities. Inventory is excluded because it may not be quickly converted into cash and its value can be uncertain in the near term, so including it could overstate liquidity. The current ratio includes inventory, making it less conservative. Debt-to-equity is a leverage measure, and asset turnover is an efficiency measure, not a liquidity measure. So the quick ratio is the best choice for excluding inventory when evaluating liquidity.

Assessing liquidity focuses on how easily a firm can meet short-term obligations. The quick ratio does this using only the most liquid assets—cash, marketable securities, and accounts receivable—divided by current liabilities. Inventory is excluded because it may not be quickly converted into cash and its value can be uncertain in the near term, so including it could overstate liquidity. The current ratio includes inventory, making it less conservative. Debt-to-equity is a leverage measure, and asset turnover is an efficiency measure, not a liquidity measure. So the quick ratio is the best choice for excluding inventory when evaluating liquidity.