Future Business Leaders of America (FBLA) Agribusiness Practice Test

What are liquidity ratios?

1. Current, Solvency, and Market ratios

2. Profitability, Activity, and Liquidity ratios

3. Current ratio, quick ratio, and acid test ratio

4. Debt, Equity, and Operating ratios

The correct answer is: Current ratio, quick ratio, and acid test ratio

Liquidity ratios are financial metrics used to evaluate a company's ability to meet its short-term obligations. These ratios indicate how easily a firm can convert its assets into cash to cover liabilities that are due within one year. The correct answer includes specific examples of liquidity ratios: the current ratio, quick ratio, and acid test ratio. The current ratio measures the company's ability to cover its short-term liabilities with its short-term assets, providing insights into its working capital management. The quick ratio, often referred to as the acid test ratio, is a more stringent measure that excludes inventory from current assets, focusing only on the most liquid assets. This ratio highlights a company's capacity to meet its short-term obligations without relying on the selling of inventory, which may not always be quickly converted into cash. By using these specific ratios as indicators, stakeholders can assess whether a business is financially stable in the short term. This comprehensive understanding of liquidity is crucial for investors, creditors, and company management in their financial decision-making processes.