The liquidity of a firm is often measured by a ratio of what to what?

• A. Current assets to current liabilities
• B. Net income to sales
• C. Total assets to total liabilities
• D. Quick assets to current liabilities

Answer: (A)

Liquidity is about a firm's ability to cover short-term obligations. The standard gauge is the current ratio, which compares current assets to current liabilities. It shows how many dollars of short-term assets are available for each dollar of short-term debt due soon. Values above 1 indicate there are enough resources to meet near-term obligations. The other options point to profitability (net income relative to sales) or long-term solvency (total assets relative to total liabilities), and the quick ratio (quick assets to current liabilities) is a stricter liquidity measure that excludes inventory. So the commonly used liquidity measure is current assets to current liabilities.