The quick ratio is a measure of liquidity. If the ratio is 1:1, what does this imply?

The quick ratio is a measure of liquidity. If the ratio is 1:1, what does this imply?

• A. The entity can meet existing liabilities if they all fall due simultaneously from liquid assets.
• B. The entity has more inventory than current liabilities.
• C. The entity is unable to cover liabilities with liquid assets.
• D. The entity will rely on external financing to meet obligations.

Answer: (A)

The quick ratio uses only the most liquid assets—cash, marketable securities, and receivables—relative to current liabilities. A 1:1 result means quick assets equal current liabilities, so the entity has just enough readily convertible assets to settle its short-term obligations if everything became due at once. Because inventory is excluded from quick assets, this shows the firm can meet obligations without selling inventory, but there’s no extra cushion beyond the current liabilities. It's a stricter measure than the current ratio, and timing or collection issues could still affect actual ability to pay.

The quick ratio uses only the most liquid assets—cash, marketable securities, and receivables—relative to current liabilities. A 1:1 result means quick assets equal current liabilities, so the entity has just enough readily convertible assets to settle its short-term obligations if everything became due at once. Because inventory is excluded from quick assets, this shows the firm can meet obligations without selling inventory, but there’s no extra cushion beyond the current liabilities. It's a stricter measure than the current ratio, and timing or collection issues could still affect actual ability to pay.