Question

Technical liquidity is normal evaluated on the basis of the following ratio in a human enterprise:
(A) Current ratio
(B) Quick or Acid-test ratio
(C) Absolute liquid ratio
(D) All of these

Answer 1

Answer:

Which is the best ratio to evaluate short term liquidity?

A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.

Answer 2

Answer:(D) All of these

Technical liquidity is normally evaluated on the basis of All of these ratios in a human enterprise

Explanation:

To analyze the liquidity of an enterprise  they often use the following ratios:

• Current ratio
• Quick or Acid-test ratio
• Absolute liquid ratio

Current Ratio:

• A liquidity ratio called the current ratio assesses a company's capacity to settle short-term debts or those that are due within a year.
• It explains to investors and analysts how a business may use its present assets to the fullest extent possible to pay down its current liabilities and other payables.
• In general, an appropriate current ratio is one that is comparable to the industry norm or just a little bit higher.
• The likelihood of distress or default may be increased by a current ratio that is lower than the industry norm.
• In a similar vein, if a business's current ratio is much higher than that of its peer group,
• Formula: Current Ratio = Current Assets/ Current Liability

Quick or Acid-test ratio:

• The acid test, also known as the quick ratio, determines if a corporation has enough cash on hand to cover its immediate commitments, such as short-term debt, by comparing its most short-term assets to its most short-term liabilities.
• Current assets that are difficult to dispose of rapidly, such as inventories, are disregarded by the acid-test ratio.
• Formula: Acid test ratio = Quick Assets/Current Liability

Absolute liquid ratio:

• This ratio establishes the link between absolute liquid assets and current liabilities.
• Cash on hand, cash in the bank, marketable securities, and short-term investments are all included in the definition of absolute liquid assets.
• This ratio should be 1: 2, which is the most advantageous and ideal value.
• Formula: Absolute liquidity ratio =(Cash + Marketable Securities)÷ Current Liability

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