Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

4. Merchandising Operations

Net Sales

Financial Accounting

4. Merchandising Operations

Net Sales

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Multiple Choice

Which of the following is one measure of liquidity?

Gross Profit Margin

Debt-to-Equity Ratio

Net Sales

Current Ratio

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Verified step by step guidance

Understand the concept of liquidity: Liquidity refers to a company's ability to meet its short-term obligations using its current assets. Measures of liquidity help assess whether a company can pay off its debts as they come due.

Review the definition of the Current Ratio: The Current Ratio is a widely used measure of liquidity. It is calculated as the ratio of current assets to current liabilities, expressed as:

\frac{Current Assets}{Current Liabilities}

. This ratio indicates how many times a company’s current assets can cover its current liabilities.

Compare the given options: Gross Profit Margin measures profitability, Debt-to-Equity Ratio assesses financial leverage, and Net Sales is a measure of revenue. None of these directly measure liquidity. The Current Ratio, however, is specifically designed to evaluate liquidity.

Understand why the Current Ratio is the correct answer: A higher Current Ratio indicates better liquidity, as it shows the company has more current assets relative to its current liabilities. This makes it a reliable measure of liquidity.

Conclude the reasoning: Based on the definitions and purposes of the given options, the Current Ratio is the correct measure of liquidity because it directly evaluates the company’s ability to meet short-term obligations.