Question

The _________ is a measure of liquidity which excludes _______, generally the least liquid asset.

Options

• current ratio, trade receivable

• liquid ratio, trade receivable

• current ratio, inventory

• liquid ratio, inventory

Answer 1

The liquid ratio is a measure of liquidity which excludes inventory, generally the least liquid asset.

Explanation:

The liquid ratio is a strict measure of short-term liquidity that specifically excludes inventory from current assets. Inventory is generally considered the least liquid asset because it cannot be instantly converted into cash; it must first be sold to a buyer, and the resulting credit must be collected. By leaving out this slow-moving stock, the liquid ratio focuses purely on quick assets like cash and bank balances to test how easily a company can meet its urgent debts.