DECA Retail Merchandising Practice Exam

Which financial metric is important for assessing a company's ability to meet short-term obligations?

1. Quick Ratio

2. Debt Ratio

3. Current Ratio

4. Net Profit Margin

The correct answer is: Quick Ratio

The Quick Ratio is an important financial metric used to assess a company's ability to meet its short-term obligations, specifically focusing on its most liquid assets. This ratio measures the immediate liquidity by comparing liquid assets to current liabilities, omitting inventory from the assets since inventory may not be as quickly convertible to cash as other liquid assets like cash and receivables. A higher Quick Ratio indicates a stronger position to cover short-term debts without relying on the sale of inventory, which can sometimes be less dependable. The Quick Ratio is particularly beneficial for evaluating businesses during times of economic uncertainty or cash flow issues, providing insight into whether the company can respond to imminent financial demands. While other financial metrics such as the Current Ratio also measure liquidity, the Quick Ratio is considered a more stringent test of liquidity since it focuses solely on assets that can be quickly converted to cash.