Multiple Choice
Expenses a firm incurs for insurance, office salaries, and rent are classified as:
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1. Introduction to Accounting
Types of Accounting
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All of the following are used to measure liquidity except:
A
Debt-to-equity ratio
B
Current ratio
C
Cash ratio
D
Quick ratio
Verified step by step guidance1
Understand the concept of liquidity: Liquidity refers to a company's ability to meet its short-term obligations using its most liquid assets. Ratios that measure liquidity focus on current assets and liabilities.
Review the provided options: Current ratio, Cash ratio, Quick ratio, and Debt-to-equity ratio. Identify which of these ratios are commonly used to measure liquidity.
Define each ratio: The Current ratio, Cash ratio, and Quick ratio are all liquidity ratios that assess a company's ability to pay short-term liabilities. The Debt-to-equity ratio, however, measures financial leverage and is not a liquidity ratio.
Explain why Debt-to-equity ratio is not a liquidity measure: The Debt-to-equity ratio evaluates the proportion of debt financing relative to equity financing, focusing on long-term financial structure rather than short-term liquidity.
Conclude that the correct answer is Debt-to-equity ratio, as it does not measure liquidity, unlike the other options provided.
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