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    Question

    Which of the following ratios are used to measure a firm’s liquidity and solvency?

    A Current ratio and a quick ratio Correct Answer Incorrect Answer
    B Debt to equity ratio and financial leverage ratio Correct Answer Incorrect Answer
    C Cash ratio and total debt ratio Correct Answer Incorrect Answer
    D Quick ratio and inventory turnover Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Cash ratio provides information about liquidity and total debt ratio determines the solvency of a business. The cash ratio is a liquidity metric that indicates a company’s capacity to pay off short-term debt obligations and current liabilities with its cash and cash equivalents. Cash Ratio = Cash and cash equivalents/current liabilities Total Debt ratio is also known as the Debt to Asset ratio. Is a leverage ratio that indicates the percentage of assets that are being financed with debt. The higher the ratio, the greater the degree of leverage and financial risk. Total debt Ratio = total debt/total assets

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