DECA Retail Merchandising Practice Exam

What does the quick ratio assess in a company's financial health?

1. Ability to borrow long-term

2. Short-term liquidity

3. Long-term profitability

4. Revenue growth

The correct answer is: Short-term liquidity

The quick ratio is a financial metric that evaluates a company's short-term liquidity by measuring its ability to cover its current liabilities with its most liquid assets. This ratio specifically focuses on assets that can be quickly converted to cash, such as cash and cash equivalents, accounts receivable, and short-term investments, while excluding inventory from the calculation. When analyzing a company’s quick ratio, a higher value indicates a stronger position to meet short-term obligations without relying on the sale of inventory, which may not be instantly liquid. Consequently, this measurement provides insights into the company’s immediate financial health and operational efficiency. A solid quick ratio is particularly important for businesses facing unpredictable cash flow challenges, as it helps ensure that they can navigate short-term financial positions and obligations effectively. In contrast, other options relate to different aspects of financial analysis: the ability to borrow long-term deals with creditworthiness and long-term financing potential; long-term profitability assesses overall financial success over an extended period; and revenue growth focuses on sales expansion rather than liquidity.