- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 22. Understanding Balance Sheets
- Subject 5. Uses and Analysis of the Balance Sheet
CFA Practice Question
Internal liquidity ratios ______
A. include the current ratio, quick ratio, and cash ratio. The quick ratio is equal to cash plus marketable securities, divided by current liabilities. The cash ratio is equal to cash divided by current liabilities.
B. indicate a firm's ability to meet its future short or medium-term financial obligations.
C. include the quick ratio, inventory turnover, and receivables turnover. The quick ratio is equal to cash plus marketable securities plus receivables, divided by current liabilities. Receivables turnover is equal to net annual sales divided by average receivables.
Explanation: Internal liquidity ratios indicate a firm's ability to meet its future short-term financial obligations. Internal liquidity ratios include the current, quick, and cash ratios, receivables turnover, and inventory turnover. The current ratio is equal to current assets divided by current liabilities. The cash ratio is equal to cash plus marketable securities, divided by current liabilities. Return on equity (ROE) is an operating profitability ratio.
User Contributed Comments 12
| User | Comment |
|---|---|
| humphrey | wouldn't the answer be A? |
| NConroy | My guess is the discrenecy in the Cash Ratio.. The last choice says that the Cash ratio is equal to Cash plus marketable securities, divided by current liabilities, while A only stipulates CASH divided by current liabilities. |
| Menzies | The quick ratio is also wrong in A...it also includes receivables |
| treakj | Liquidity rate is only for short, and includes current, quick, cash, receivables and inventories... |
| cebus | A is wrong because the quick ratio includes receivables B is wrong because it's for short-term only |
| michaeloa3 | I thought inventory turnover and receivables turnover were activity ratios! |
| alles | What is wrong here in my opinion is that turnover ratios are activity ratios, not liquidity ratios. |
| farhan92 | alles thats why i went with A. Although i did notice the error with ratio in A it just felt like a better answer at the time |
| navarro | Is there any diference between internal liquidity ratios and liquidity ratios? |
| Albert123 | Isn't inventory turnover and receivables turnover a measure of activity ratios? |
| tisch187 | turnover ratios are NOT liquidity ratios |
| dbalakos | since when is inventory turnover a liquidity ratio and not an activity one? |