Which liquidity measure excludes inventory from current assets?

• A. Current Ratio
• B. Quick Ratio
• C. Cash Ratio
• D. Net Working Capital

Answer: (B)

The main idea is to test liquidity after removing inventory because inventory can be slow to convert into cash. The quick ratio measures this by taking current assets minus inventories and dividing by current liabilities. By removing inventory from the numerator, it focuses on the most liquid assets that can be quickly turned into cash to meet near-term obligations, giving a more conservative view of liquidity than the current ratio, which includes inventory.

While the current ratio includes all current assets, including inventory, and net working capital subtracts current liabilities from all current assets (still including inventory), the quick ratio specifically excludes inventory to reflect true immediate liquidity. The cash ratio goes even further by considering only cash and cash equivalents, which also excludes inventory, but the standard approach described by excluding inventory from current assets in the measure is the quick ratio.