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# Financial Liquidity Ratios Quiz: Current Ratio, Cash Ratio, Quick Ratio, Working Capital Ratio, Operating Cash Flow Ratio

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@WorkableIodine

### What is the formula for calculating the Quick Ratio?

(Cash + Accounts Receivable + Marketable Securities) / Current Liabilities

### How is the Working Capital Ratio calculated?

Current Assets / Total Current Liabilities

### What does a Working Capital Ratio greater than 1 imply?

It implies that the company has sufficient resources to cover short-term obligations.

### What does the Operating Cash Flow Ratio assess?

<p>It assesses a firm's ability to generate cash through its core business activities.</p> Signup and view all the answers

### What does an Operating Cash Flow Ratio of 1 or higher suggest?

<p>It suggests that the company can cover its short-term obligations with its operating cash flow alone.</p> Signup and view all the answers

### How do liquidity ratios contribute to analyzing a company's financial strength?

<p>Liquidity ratios help in assessing a company's ability to handle short-term financial responsibilities, identify risks, and compare performance against peers.</p> Signup and view all the answers

### What is the formula for calculating the current ratio?

<p>Current Ratio = Current Assets / Current Liabilities</p> Signup and view all the answers

### What does a current ratio greater than 1 indicate?

<p>A current ratio greater than 1 suggests sufficient liquidity, indicating that the company has enough assets to cover all its short-term liabilities.</p> Signup and view all the answers

### What is the cash ratio, and how is it calculated?

<p>The cash ratio, also known as the cash-to-debt ratio, is calculated as: Cash Ratio = (Cash + Marketable Securities) / Total Liabilities</p> Signup and view all the answers

### What does a high cash ratio indicate about a company's financial position?

<p>A high cash ratio indicates that a company has minimal short-term debt, relying mostly on cash to settle its current liabilities.</p> Signup and view all the answers

### What assets are included in the quick ratio calculation?

<p>The quick ratio includes cash, marketable securities, and accounts receivable.</p> Signup and view all the answers

### What are the five key liquidity ratios discussed in the text?

<p>The five key liquidity ratios discussed are: current ratio, cash ratio, quick ratio, working capital ratio, and operating cash flow ratio.</p> Signup and view all the answers

## Financial Ratio Liquidity: Understanding Current Ratio, Cash Ratio, Quick Ratio, Working Capital Ratio, and Operating Cash Flow Ratio

Financial liquidity ratios are crucial indicators of a company's ability to meet its short-term financial obligations. These ratios help investors and analysts evaluate a company's financial health and assess its capacity to generate cash flows. Here, we'll discuss five key liquidity ratios:

1. Current Ratio: This is the simplest liquidity ratio, computed by dividing a company's current assets by its current liabilities. It provides an overall assessment of a company's ability to pay off its short-term debts using its current assets. A current ratio greater than 1 suggests sufficient liquidity, indicating that the company has enough assets to cover all its short-term liabilities.

Current Ratio = Current Assets / Current Liabilities

2. Cash Ratio: Also known as the cash-to-debt ratio, the cash ratio is a strict test of a company's liquidity. It divides net cash (cash plus marketable securities) by total liabilities. A high cash ratio indicates that a company has minimal short-term debt, relying mostly on cash to settle its current liabilities.

Cash Ratio = (Cash + Marketable Securities) / Total Liabilities

3. Quick Ratio: Similar to the current ratio, the quick ratio focuses solely on the most liquid assets, including cash, marketable securities, and accounts receivable. By leaving out less liquid assets such as inventory and prepaid expenses, it provides a truer representation of a company's ability to meet immediate obligations.

Quick Ratio = (Cash + Accounts Receivable + Marketable Securities) / Current Liabilities

4. Working Capital Ratio: This ratio shows the relationship between a company's current assets and its total current liabilities. It is calculated by dividing a company's current assets by its total current liabilities. A working capital ratio greater than 1 implies that a company has sufficient resources to cover its short-term obligations.

Working Capital Ratio = Current Assets / Total Current Liabilities

5. Operating Cash Flow Ratio: Unlike the previously mentioned ratios, which focus on the liquidity aspects of a company, the operating cash flow ratio assesses a firm's ability to generate cash through its core business activities. It is determined by dividing operating cash flow by current liabilities. A ratio of 1 or higher suggests that a company can cover its short-term obligations with its operating cash flow alone.

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities

These five liquidity ratios play a significant role in demonstrating a company's ability to handle its short-term financial responsibilities. They allow investors and analysts to analyze a company's financial strength, identify any potential risks related to its liquidity, and compare its performance against industry peers.

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## Description

Test your knowledge on key financial liquidity ratios like current ratio, cash ratio, quick ratio, working capital ratio, and operating cash flow ratio. Learn how these ratios help assess a company's liquidity, financial health, and ability to meet short-term obligations.

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