Certified Materials and Resource Professional Practice

The Liquidity Ratio is a measure of a company's ability to cover its short-term obligations with its most liquid assets. The correct method of calculating the Liquidity Ratio involves dividing total liquid assets by total current debts. This calculation shows how easily a company can meet its short-term liabilities using its most readily available resources.

By focusing on liquid assets, which are cash or assets that can be quickly converted to cash, this ratio provides a clear view of financial health in terms of liquidity. It emphasizes the essential ability to manage immediate financial responsibilities and is crucial for stakeholders assessing the company's risk level.

Other choices describe different financial ratios or metrics and do not accurately represent the Liquidity Ratio. For instance, one option talks about total current assets relative to current liabilities, which pertains to the current ratio rather than the liquidity ratio. Thus, the correct calculation of the Liquidity Ratio reflects a company's immediate financial stability and preparedness to handle short-term obligations.