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Which of the following ratios best measures a company’s ability to meet its short‑term obligations without raising new external capital?

easy MCQ 2 marks Class 12 · Accountancy · Analysis of Financial Statements
  1. Current ratio
  2. Quick ratio
  3. Debt‑to‑equity ratio
  4. Return on assets
Answer
Quick ratio

The correct answer is Quick ratio — 4. Therefore, the quick ratio is the correct choice.

Step-by-step solution

  1. 1. Recall that the quick ratio, also known as the acid‑test ratio, measures liquidity using only the most liquid assets (cash, marketable securities, accounts receivable).
  2. 2. The current ratio includes all current assets, including inventory, which may not be quickly converted to cash. The quick ratio excludes inventory and thus gives a stricter measure of liquidity without new external funding.
  3. 3. Debt‑to‑equity and return on assets are profitability or leverage ratios, not liquidity measures.
  4. 4. Therefore, the quick ratio is the correct choice.
Common mistake: Choosing current ratio instead of quick ratio because it also measures short‑term obligations.

Concept tested: Liquidity ratios – Quick ratio

Published · How this solution was prepared and checked

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