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

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BlackTom AI · Accepted Answer

Restating the question: The prompt asks for the name of financial ratios that measure a firm's ability to meet its short-term commitments.

Option 1: Liquidity ratios. These are indeed the ratios that assess the firm’s short-term liquidity, typically focusing on current assets versus current liabilities, such as the current ratio or quick ratio. This aligns with the concept of meeting short-term obligations.

Option 2: Activity ratios. These evaluate how efficiently a firm uses its assets to generate sales or manage operations (e.g., inventory turnover, accounts receivable turnover). They do not specifically measure short-term liquidity.

Option 3: Solvency ratios. These examine a firm’s long-term financial obligations and overall long-run solvency, such as debt-to-equity or interest coverage. They are concerned with long-term stability rather than immediate short-term commitments.

Option 4: Profitability ratios. These assess a firm’s ability to generate profit from its resources (e.g., net profit margin, return on assets). They focus on earnings performance, not on meeting short-term liabilities.

Putting it together, only Liquidity ratios directly address the ability to meet short-term commitments, while the other options pertain to asset efficiency, long-term solvency, or profitability, respectively.

BFIL001 Week 8 Practice Quiz

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

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