Explain the concept of liquidity and name two liquidity ratios.

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Liquidity is about the ability to meet short-term obligations with assets that can be quickly turned into cash. The current ratio compares all current assets to current liabilities, showing how much cushion a company has to cover near-term debts. The quick ratio tightens this by excluding inventories, using only cash, marketable securities, and accounts receivable against current liabilities to reflect what can be accessed quickly if needed. Higher values generally indicate stronger short-term solvency, while values below 1 can signal liquidity stress.

These measures focus on short-term financial health, unlike long-term solvency measures such as debt-to-equity or interest coverage, which look at leverage and debt service over time. They also aren’t about profitability or efficiency metrics like margins or asset turnover. So naming the current ratio and the quick ratio captures the essence of liquidity and its common gauges.