Thom is an accountant at Merco Products. Merco has decided to put a pr

QUESTION

Thom is an accountant at Merco Products. Merco has decided to put a priority on paying off short-term debt to ensure its continued financial health. Which of the following types of ratio analyses is Thom most likely to do to further this goal?

A) an activity ratio
B) a debt-to-owners’-equity ratio
C) a liquidity ratio
D) a profitability ratio
E) an inventory turnover ratio

ANSWER

Answer: C
Explanation: C) Calculating a firm’s liquidity ratio, by either a current ratio or acid-test ratio, is the best way to tell how much value a firm holds that is either cash or can easily be turned into cash for the purpose of paying down short-term debt.