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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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9. How do the current and quick ratios differ? Which is a more conservative measure of short-term liquidity? Support your answer.

To determine

The difference between current ratio and quick ratio and which one is more conservative measure of short term liquidity.

Explanation

Current ratio and quick ratio both measure a company’s short term liquidity. That is they access the ability of the company to generate enough cash so that it can pay off all the debts when they become due.

So, both the ratios measures the financial health of the company.

Current ratio:

is defined as a ratio that measures the ability of the company to pay its current or short term liabilities with its current assets.

It is measured by using the formula.

Current ratio = Current Assets/ Current Liabilities

Current assets represents the value of all the assets that can be converted into cash within a period of one year...

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