Which ratio excludes inventories when measuring liquidity?

• A. Quick ratio
• B. Current ratio
• C. Debt to equity
• D. ROA

Answer: (A)

Liquidity measures how quickly a company can meet its short-term obligations. The quick ratio is the tighter test because it excludes inventories, which can be slow to convert into cash or may require price concessions or time to sell. By using only cash, marketable securities, and accounts receivable against current liabilities, the quick ratio focuses on assets that are most readily turned into cash in the near term, giving a clearer picture of immediate liquidity. The other two options aren’t liquidity measures: debt to equity looks at leverage, and ROA assesses profitability relative to assets. For example, if current assets include a large amount of inventory, the current ratio may look strong, but the quick ratio will better reflect how quickly those assets can cover obligations if inventory can’t be sold quickly.