Questions: Knowledge Check 01 The current ratio is similar to the quick ratio but is based on a more conservative measure of current assets available to pay current liabilities. True or False

False

The current ratio and the quick ratio are both measures of a company's ability to pay its short-term obligations, but they differ in how they calculate current assets:

• The current ratio is calculated by dividing a company's total current assets by its total current liabilities. It includes all current assets, such as cash, accounts receivable, and inventory.

• The quick ratio, also known as the acid-test ratio, is a more conservative measure because it excludes inventory from current assets. It is calculated by dividing a company's liquid assets (cash, marketable securities, and accounts receivable) by its current liabilities. The quick ratio provides a stricter assessment of a company's short-term liquidity by focusing only on the most liquid assets.

Therefore, the quick ratio is the more conservative measure, not the current ratio.