Question

Why liquid ratio is considered more dependable than current ratio?

Answer 1

The Liquid Ratio is considered more dependable than the Current Ratio because it removes inventory and prepaid expenses, which may be difficult to convert into cash. It only considers liquid assets such as cash and receivables, providing a more accurate picture of a company’s capacity to satisfy short-term obligations. If inventory moves slowly or is unsellable, the Current Ratio might be deceiving.