Which metric compares current assets to current liabilities to assess short-term liquidity?

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Multiple Choice

Which metric compares current assets to current liabilities to assess short-term liquidity?

Liquidity in the near term is assessed by comparing current assets to current liabilities. The current ratio does this directly by dividing current assets by current liabilities. It shows how much cushion the company has to cover its short-term obligations with assets that are expected to be converted to cash within a year. A higher ratio indicates stronger short-term solvency; for example, a ratio of 2.0 means current assets are twice current liabilities, suggesting solid liquidity. The quick ratio is a related measure but more conservative because it excludes inventory from current assets. The debt-to-equity ratio looks at financing structure, not short-term liquidity, and return on assets focuses on profitability rather than liquidity.

Liquidity in the near term is assessed by comparing current assets to current liabilities. The current ratio does this directly by dividing current assets by current liabilities. It shows how much cushion the company has to cover its short-term obligations with assets that are expected to be converted to cash within a year. A higher ratio indicates stronger short-term solvency; for example, a ratio of 2.0 means current assets are twice current liabilities, suggesting solid liquidity.

The quick ratio is a related measure but more conservative because it excludes inventory from current assets. The debt-to-equity ratio looks at financing structure, not short-term liquidity, and return on assets focuses on profitability rather than liquidity.

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