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Current, Quick, Cash Ratios and Short Term Liquidity

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I'm writing a pretty lengthy paper but I'm stuck on these two points. Please help.

- Describe the circumstances under which the current, quick and cash ratios, respectively, are more appropriate measures of short term liquidity than other ratios.
- Describe the effect of a cash versus a stock dividend on stockholder's equity.

Examples are helpful as are references so that I can use for research for my paper.

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Solution Summary

This solution describes the circumstances under which the current, quick and cash ratios, respectively, are more appropriate measures of short term liquidity than other ratios. It also describes the effect of a cash versus a stock dividend on stockholder's equity. It gives examples and APA references.

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Describe the circumstances under which the current, quick and cash ratios, respectively, are more appropriate measures of short-term liquidity than other ratios.

Current ratio measures a company's ability to pay short-term obligations. The formula is current ratio=current assets/current liabilities.
This ratio measure the ability of a company to pay back its' short term liabilities with its' short term assets. Short-term liabilities would be debt and payables; short-term assets include cash, inventory, and receivables. The higher the ratio, the more capable the company is of paying off its' obligations. If the ratio is under 1, it is probable that a company would be unable to cover its' obligations if they came due at that point. This is not a good sign. The current ratio gives a sense of the efficiency at which the company is operating as well as its' ability to turn product into cash. If the company is not turning its' receivable into cash, not cycling through its' inventory, or has larger debt than they might run into liquidity problems and be unable to alleviate their debt. It is important to consider this ratio in perspective of other companies within the same industry. It is also useful to combine this knowledge with potential in the market to gain a broader view of the company. Shareholders like a low current ratio ...

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Sally Baldwin, Ed.D
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  • MSS, United States Sports Academy
  • Ed.D, Boise State University
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