Module: General Practice
Q122: Consider the following statements regarding liquidity ratios:
Assertion (A): Bankers often calculate the "Quick Ratio" (Acid Test Ratio) in addition to the Current Ratio to assess immediate liquidity.
Reason (R): The Current Ratio includes Inventory (Stock), which may not be easily convertible into cash, whereas the Quick Ratio excludes Inventory and Prepaid Expenses.
Reason (R): The Current Ratio includes Inventory (Stock), which may not be easily convertible into cash, whereas the Quick Ratio excludes Inventory and Prepaid Expenses.
✅ Correct Answer: A
Logic: Current Ratio: Current Assets / Current Liabilities.
It assumes all current assets (including slow-moving stock) can pay off liabilities.
Reason (R): Inventory is often the least liquid current asset.
It must first be sold (converted to receivables) and then collected (converted to cash). Assertion (A): Therefore, to test immediate solvency (ability to pay bills today), bankers use the Quick Ratio: (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities.
This provides a stricter "Acid Test" of liquidity.
It assumes all current assets (including slow-moving stock) can pay off liabilities.
Reason (R): Inventory is often the least liquid current asset.
It must first be sold (converted to receivables) and then collected (converted to cash). Assertion (A): Therefore, to test immediate solvency (ability to pay bills today), bankers use the Quick Ratio: (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities.
This provides a stricter "Acid Test" of liquidity.