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FIN621 GDB Fall 2019 Solution & Discussion Last Date: 28-01-2020

otal Marks 5
Starting Date Wednesday, January 22, 2020
Closing Date Tuesday, January 28, 2020
Status Open
Question Title Liquidity
Question Description

Learning outcome: After attempting this activity, students will be able to understand the concept of “Liquidity Analysis”.



Liquidity is considered as the ability of a firm to pay off its short term liabilities. A firm with good liquidity means that the firm possesses sufficient liquid funds to compare short-term obligations to short-term (or current) resources available to meet these obligations. The liquidity of a firm is measured through current ratio, acid-test ratio, cash ratio, working capital etc. These ratios provide insight about the present cash solvency and ability of the firm to remain solvent in the event of adversity.

In normal circumstances, for determining the short term liquidity of a firm, the current ratio is usually considered to be a better guide than the acid test ratio, whereas; acid test ratio is considered to be a better guide than the cash ratio.




You are required to describe the situation:

  • When the acid test ratio is preferred over current ratio?
  • When the cash ratio is preferred over acid-test ratio?

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