Question : Assertion (A): Liquidity Ratios are used to evaluate a firm's long-term financial position. Reason (R): Liquidity ratios, such as the current ratio and quick ratio, are useful in determining the firm's long-term financial position.
Option 1: Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
Option 2: Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
Option 3: Assertion (A) is true but Reason (R) is False
Option 4: Assertions (A) is False and Reason (R) is False.
Correct Answer: Assertions (A) is False and Reason (R) is False.
Solution : The firm's short-term financial position is evaluated using liquidity ratios. Analysis of liquidity ratios aids in determining a company's ability to be solvent in the short term. This means that it aids in determining a company's capacity to fulfill its immediate responsibilities. The quick and current ratios are liquidity ratios that help investors and analysts gauge a company's ability to meet its short-term obligations. Therefore, liquidity refers to how rapidly a company's assets are transformed into cash. Hence option 4 is the correct answer.
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