Which term is described as one of the simplest liquidity ratios?

• A. Current Ratio
• B. Quick Ratio
• C. Cash Ratio
• D. Working Capital

Answer: (D)

Working capital is the simplest liquidity measure because it is just the difference between current assets and current liabilities. This dollar amount shows at a glance how much resources are available to cover short-term obligations. It doesn’t involve dividing assets by liabilities or adjusting for inventories, so it’s a straightforward, easy-to-interpret indicator of short-term liquidity.

The other terms are ratios: current ratio expresses liquidity as a proportion of current assets to current liabilities, the quick ratio is a more stringent measure that excludes inventories, and the cash ratio focuses only on cash and cash equivalents relative to current liabilities. Because working capital is simply a net dollar amount, it’s the most basic, direct gauge of liquidity.