Question : Which of the following statements is incorrect?
Option 1: The quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately.
Option 2: The quick ratio is calculated by dividing liquid assets (Quick Current Assets) by current liabilities.
Option 3: 'Liquid assets' means those assets which will be converted into cash and cash equivalents very shortly.
Option 4: None of the above
Correct Answer: The quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately.
Solution : Answer = The quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately.
The quick ratio assesses the firm's ability to meet short-term liabilities, but not necessarily within a specific timeframe, like a month. The quick ratio evaluates a company's ability to settle its
short-term obligations
using its most liquid assets. Liquid assets, such as cash, marketable securities, and accounts receivable, are those that can be readily converted into cash. The ratio is calculated by dividing these
liquid assets
by
current liabilities
.
Hence, the correct option is 1.
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