Author Question: Explain the difference between the current ratio and the cash flow liquidity ratio. What will be ... (Read 86 times)

Awilson837 · **on:** Jul 6, 2018

Explain the difference between the current ratio and the cash flow liquidity ratio.

What will be an ideal response?

Question 2

The employer must prepare at least four copies of each W-2 form.
Indicate whether the statement is true or false

31809pancho · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

Both the current ratio and the cash flow liquidity ratio measure short-term solvency and the denominator of both ratios is current liabilities. The difference in the ratios lies in the numerator. The current ratio includes the current assets of a firm in the numerator and is limited by the nature of its components. The actual amount of liquid assets may vary considerably from the date on which the balance sheet is prepared. Further, accounts receivable and inventory may not be truly liquid. A firm could have a relatively high current ratio but not be able to meet demands for cash because the accounts receivable are of inferior quality or the inventory is salable only at discounted prices. It is necessary to use other measures of liquidity, including cash flow from operations and other financial ratios that rate the liquidity of specific assets, to supplement the current ratio. The cash flow liquidity ratio offers an alternative to the current ratio. The numerator for this ratio includes only liquid items: cash and cash equivalents, marketable securities, and cash flow from operating activities.

Answer to Question 2

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