Financial ratios that measure the ability of a firm to meet its short-term commitments are known as ………… ratios.

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The question asks about financial ratios that measure a firm’s ability to meet its short-term commitments.
Option 1: Activity ratios. These assess how efficiently a firm uses its assets to generate sales or how well assets are turned into revenue, not specifically about short-term liquidity. They focus on operational efficiency rather than immediate debt-paying capability.
Option 2: Solvency ratios. These evaluate long-term financial stability and the firm’s ability to meet long-term obligations, such as debt repayments over many years. They are concerned with long-term capital structure, not short-term liquidity.
Option 3: Profitability ratios. These measure a firm’s ability to generate profit relative to sales, assets, or equity. They tell us about earnings performance, not about the capacity to cover near-term liabilities.
Option 4: Liquidity ratios. These directly gauge whether a company can meet its short-term obligations with liquid assets, such as current assets relative to current liabilities. This category explicitly targets the firm’s ability to cover immediate debts and obligations.
In summary, identify the group of ratios that centers on short-term financial health and the ability to settle near-term bills, rather than efficiency, long-term solvency, or profitability concepts. The descriptions above align with those distinctions, clarifying why the liquidity-focused set is the appropriate match for short-term commitment coverage.

25400 Financial Literacy - Spring 2025 🔴 Practice Questions for In-class Quiz 2

Financial ratios that measure the ability of a firm to meet its short-term commitments are known as ………… ratios.

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