Which of the following ratios is commonly used to measure a company's liquidity by excluding inventory from current assets?

• A. Gross Profit Margin
• B. Debt-to-Equity Ratio
• C. Quick (Acid Test) Ratio
• D. Inventory Turnover Ratio

Answer: (C)

Verified step by step guidance

1. Understand the concept of liquidity: Liquidity refers to a company's ability to meet its short-term obligations using its most liquid assets. Ratios measuring liquidity focus on current assets and liabilities.
2. Learn about the Quick (Acid Test) Ratio: This ratio excludes inventory from current assets because inventory is considered less liquid compared to cash, accounts receivable, or other current assets.
3. Formula for Quick (Acid Test) Ratio: The formula is \( \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} \). This ensures only the most liquid assets are considered.
4. Identify why inventory is excluded: Inventory may take time to convert into cash, and its value can fluctuate, making it less reliable for immediate liquidity needs.
5. Compare with other ratios: Gross Profit Margin measures profitability, Debt-to-Equity Ratio assesses financial leverage, and Inventory Turnover Ratio evaluates inventory management efficiency. None of these focus on liquidity in the same way as the Quick Ratio.