Question

Explain three liquidity ratios and how they are used.

Answer 1

Liquidity ratio means the liquidity of the company that is how well the company can deal with its short term debts

3 ratios

1	Current ratio = Current assets / current liabilities

Current ratio states how well the current liabilities can be paid using the current assets.

2	Acid test ratio = Acid test assets / current liabilities
	Acid test assets = current assets - prepaid expense - merchandise inventory

Acid test ratio shows how well the current liabilities can be paid with acid test assets , this is also called quick ratio as it has quick assets that can be more quickly converted into cash and current liabilities are paid

3. Cash ratio = Cash + marketable securities / current liabilities

Cash ratio states how well the short term obligations can be paid with the cash assets in hand.