Chapter 14, Problem 1STQ

To determine

Identify which of the stated ratio or item that is least important as a measure of short-term liquidity.

Answer to Problem 1STQ

c. Debt ratio.

Explanation of Solution

Option a. Quick ratio: The liquidity ratio which evaluates the ability of a company to pay off the instant debt obligations is referred to as quick ratio. Quick assets are cash, marketable securities, and accounts receivables.

Option b. Current ratio: Current ratio is one of the liquidity ratios, which measures the capacity of the company to meet its short-term obligations using its current assets

Option c. Debt ratio: The debt ratio shows the relationship between total asset and the total liability of the company. Debt ratio reflects the financial strategy of the company. It is used to measure the percentage of company’s assets that are financed by long term debts.

Option d. Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company. Cash flows from operating activities are reported in the statement of cash flows to ascertain the amount of cash inflows and outflows from operating activities during the year. Hence, it is not a measure of short term liquidity.

From the above explanation, Options (a), (b) and (c) are incorrect answers. Thus, the correct answer is Option (c).

Conclusion

Hence, the correct answer is Option c. Debt ratio.