{"id":16328,"date":"2025-06-11T08:55:21","date_gmt":"2025-06-11T08:55:21","guid":{"rendered":"https:\/\/gaviki.com\/blog\/?p=16328"},"modified":"2025-06-11T08:55:24","modified_gmt":"2025-06-11T08:55:24","slug":"a-ratio-that-is-a-measure-of-a-companys-short-term-liquidity-is-the","status":"publish","type":"post","link":"https:\/\/gaviki.com\/blog\/a-ratio-that-is-a-measure-of-a-companys-short-term-liquidity-is-the\/","title":{"rendered":"A ratio that is a measure of a company’s short-term liquidity is the"},"content":{"rendered":"\n

A ratio that is a measure of a company’s short-term liquidity is the <\/p>\n\n\n\n

A times interest earned. <\/p>\n\n\n\n

B inventory turnover. <\/p>\n\n\n\n

C asset turnover. <\/p>\n\n\n\n

D debt to total assets ratio.<\/p>\n\n\n\n

The correct answer and explanation is:<\/strong><\/mark><\/p>\n\n\n\n

The correct answer is: None of the options listed directly measure a company’s short-term liquidity.<\/strong>
However, since this is a multiple-choice question and requires choosing the best among the given options, the closest match for evaluating liquidity is:<\/strong><\/p>\n\n\n\n

None are ideal, but we must clarify why.<\/em><\/strong><\/p>\n\n\n\n

Let\u2019s analyze each option:<\/p>\n\n\n\n

\n\n\n\n

A. Times Interest Earned (TIE)<\/strong><\/h3>\n\n\n\n
    \n
  • Definition<\/strong>: Measures a firm\u2019s ability to meet interest obligations.<\/li>\n\n\n\n
  • Formula<\/strong>: TIE=Earnings\u00a0before\u00a0interest\u00a0and\u00a0taxes\u00a0(EBIT)Interest\u00a0expense\\text{TIE} = \\frac{\\text{Earnings before interest and taxes (EBIT)}}{\\text{Interest expense}}<\/li>\n\n\n\n
  • Purpose<\/strong>: Solvency ratio, not a liquidity ratio. Indicates long-term ability to pay interest.<\/li>\n<\/ul>\n\n\n\n
    \n\n\n\n

    B. Inventory Turnover<\/strong><\/h3>\n\n\n\n
      \n
    • Definition<\/strong>: Measures how many times inventory is sold and replaced over a period.<\/li>\n\n\n\n
    • Formula<\/strong>: Inventory\u00a0Turnover=Cost\u00a0of\u00a0Goods\u00a0Sold\u00a0(COGS)Average\u00a0Inventory\\text{Inventory Turnover} = \\frac{\\text{Cost of Goods Sold (COGS)}}{\\text{Average Inventory}}<\/li>\n\n\n\n
    • Purpose<\/strong>: Efficiency ratio. While it may indirectly affect liquidity, it’s not a direct measure.<\/li>\n<\/ul>\n\n\n\n
      \n\n\n\n

      C. Asset Turnover<\/strong><\/h3>\n\n\n\n
        \n
      • Definition<\/strong>: Measures how efficiently a company uses assets to generate sales.<\/li>\n\n\n\n
      • Formula<\/strong>: Asset\u00a0Turnover=Net\u00a0SalesAverage\u00a0Total\u00a0Assets\\text{Asset Turnover} = \\frac{\\text{Net Sales}}{\\text{Average Total Assets}}<\/li>\n\n\n\n
      • Purpose<\/strong>: Efficiency ratio. Reflects operational performance, not liquidity.<\/li>\n<\/ul>\n\n\n\n
        \n\n\n\n

        D. Debt to Total Assets Ratio<\/strong><\/h3>\n\n\n\n
          \n
        • Definition<\/strong>: Measures the proportion of assets financed by debt.<\/li>\n\n\n\n
        • Formula<\/strong>: Debt\u00a0to\u00a0Assets=Total\u00a0LiabilitiesTotal\u00a0Assets\\text{Debt to Assets} = \\frac{\\text{Total Liabilities}}{\\text{Total Assets}}<\/li>\n\n\n\n
        • Purpose<\/strong>: Solvency ratio, indicating financial leverage, not short-term liquidity.<\/li>\n<\/ul>\n\n\n\n
          \n\n\n\n

          Correct Ratio for Short-term Liquidity (not listed):<\/h3>\n\n\n\n

          Current Ratio or Quick Ratio<\/strong><\/p>\n\n\n\n

            \n
          • Current Ratio<\/strong> = Current Assets \/ Current Liabilities<\/li>\n\n\n\n
          • Quick Ratio<\/strong> = (Current Assets \u2013 Inventory) \/ Current Liabilities
            These directly assess a company\u2019s ability to pay short-term obligations.<\/li>\n<\/ul>\n\n\n\n
            \n\n\n\n

            Conclusion:<\/h3>\n\n\n\n

            None of the provided answers directly measure short-term liquidity.<\/strong> But if forced to choose the closest<\/strong>, inventory turnover (Option B)<\/strong> may give some indirect insights, as it relates to how efficiently current assets (inventory) are converted into cash. However, for true short-term liquidity, look at current or quick ratios.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

            A ratio that is a measure of a company’s short-term liquidity is the A times interest earned. B inventory turnover. C asset turnover. D debt to total assets ratio. The correct answer and explanation is: The correct answer is: None of the options listed directly measure a company’s short-term liquidity.However, since this is a multiple-choice […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-16328","post","type-post","status-publish","format-standard","hentry","category-quiz-questions"],"_links":{"self":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/16328","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/comments?post=16328"}],"version-history":[{"count":1,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/16328\/revisions"}],"predecessor-version":[{"id":16329,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/16328\/revisions\/16329"}],"wp:attachment":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/media?parent=16328"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/categories?post=16328"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/tags?post=16328"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}