Certified in Logistics, Transportation and Distribution (CLTD) 2025 – 400 Free Practice Questions to Pass the Exam

The liquidity ratio is a financial metric used to evaluate a company's ability to meet its short-term obligations with its short-term assets. It provides insight into the financial health of a business, indicating how well current immediate assets can cover current liabilities.

The correct answer, which involves subtracting inventory from current assets and dividing the result by current liabilities, gives a more stringent view of liquidity. This approach accounts for the fact that not all current assets can be quickly converted to cash; inventory, in particular, can be less liquid and might not generate cash as quickly as receivables. By excluding inventory, the ratio focuses on readily available assets that can quickly satisfy upcoming obligations.

This method emphasizes the importance of cash and account receivable management in maintaining liquidity. It provides stakeholders with a clearer picture of a company's ability to address its short-term liabilities, which is crucial in the logistics, transportation, and distribution fields where cash flow is often tightly correlated to operational efficiency.

In comparison, other options evaluate liquidity but may include components that do not accurately reflect immediate liquidity concerns or use assets that are less readily convertible to cash.