Question

The two basic measures of liquidity are

• A. Stock & Debtors Turnover Ratio
• B. Current Ratio & Operating Ratio
• C. Current Ratio and liquid Ratio
• D. Gross & Net Profit Ratio

Hint:

When you see "liquidity," think "short-term obligations." The two key questions are: 1. Can the company pay its bills using all its current assets (Current Ratio)? 2. Can it pay its bills without having to sell its inventory (Liquid Ratio)?

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
The question asks to identify the two fundamental ratios used to measure a company's liquidity. Liquidity refers to the ability of a firm to meet its short-term financial obligations (liabilities due within one year).
Step 2: Analysis of Options:
Let's categorize the ratios in each option:

(A) Stock & Debtors Turnover Ratio: These are Activity or Efficiency Ratios. They measure how efficiently a company is using its assets.

(B) Current Ratio & Operating Ratio: The Current Ratio is a liquidity ratio, but the Operating Ratio is a Profitability/Efficiency Ratio that measures the cost of operations against sales.

(C) Current Ratio and liquid Ratio: Both are primary liquidity ratios. The Current Ratio measures the ability to pay all current liabilities with all current assets. The Liquid Ratio (also known as the Quick Ratio or Acid-Test Ratio) is a stricter measure that excludes less liquid assets like inventory.

(D) Gross & Net Profit Ratio: These are Profitability Ratios. They measure the company's ability to generate profit from its sales.

Step 3: Key Formulas:

Current Ratio = \(\frac{\text{Current Assets}}{\text{Current Liabilities}}\)
Liquid Ratio = \(\frac{\text{Liquid Assets (Current Assets - Inventory)}}{\text{Current Liabilities}}\)
These two are universally recognized as the foundational measures of short-term solvency.
Step 4: Final Answer:
Based on the analysis, the Current Ratio and Liquid Ratio are the two basic measures of liquidity. Thus, option (C) is correct.