CA Inter P6 · Chapter 3 · Question 7 of 9
Which of the following ratios is the most stringent test of a firm's short-term liquidity?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Absolute liquidity (cash) ratio
Explanation
The absolute liquidity or cash ratio compares only cash, bank balances and marketable securities with current liabilities, so it is the strictest liquidity test. The quick ratio leaves out inventory and prepaid expenses but still counts receivables. The current ratio counts all current assets. Inventory turnover is an activity ratio, not a liquidity ratio.
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