alleryStart learning →What do liquidity ratios measure?
AThe ability to pay short-term debts as they come due
BThe speed at which inventory is turned into sales
CThe share of each sales dollar left after expenses
DThe mix of borrowed funds and owners' funds used
Answer & Solution
Correct answer: A. The ability to pay short-term debts as they come due
1. Liquidity ratios measure a firm's ability to pay its short-term debts as they come due.
2. They are of special interest to the firm's creditors, who want to know they will be paid.
3. The speed of inventory moving into sales is an activity ratio, and the share of each sales dollar left is a profitability ratio.
4. The mix of borrowed and owners' funds is measured by the debt-to-equity ratio.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.7 Analyzing Financial Statements_
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