Which liquidity ratio excludes inventories from current assets?

• A. Quick ratio
• B. Current ratio
• C. Debt ratio
• D. Asset turnover

Answer: (A)

Liquidity measures look at how quickly assets can be turned into cash to meet short-term obligations. The quick ratio focuses on the most liquid assets—cash, marketable securities, and accounts receivable—so inventories are excluded because they aren’t as readily convertible to cash. This makes the quick ratio (cash plus marketable securities plus accounts receivable) divided by current liabilities a sterner test of short-term liquidity than the current ratio, which includes all current assets (including inventories). The debt ratio and asset turnover are not liquidity ratios: the debt ratio measures leverage, and asset turnover assesses how efficiently assets generate sales.