Liquidity ratios measure the ability of an entity to:
A) remain a going concern.
B) meet its short-term obligations and unexpected cash needs.
C) generate profit.
D) all of the options are correct.

Question

Quizplus · Accepted Answer

Liquidity ratios are financial ratios that measure an entity's ability to meet its short-term obligations and unexpected cash needs. These ratios indicate whether the entity has sufficient liquid resources to pay off its current debts as they become due, without disrupting its normal operations or causing financial distress. Thus, option B is the best choice. Option A is partially correct, but liquidity ratios do not directly measure a company's ability to remain a going concern in the long run, as they mainly focus on the short-term outlook for cash flow. Option C is incorrect as profitability ratios, not liquidity ratios, assess a company's ability to generate earnings and returns for its shareholders. Option D is too broad and general, as not all options are correct.

Liquidity Ratios Measure the Ability of an Entity To