Ratios for Assessing Liquidity to Pay Trade Payables

Steps:

• Trade payables are short-term liabilities to suppliers, so relevant ratios measure liquidity or cash conversion to cover them.
• Current ratio and acid-test ratio evaluate short-term assets versus liabilities, directly assessing payment ability.
• Trade receivables turnover indicates speed of collecting cash from customers, aiding payable payments.
• Expenses to revenue ratio assesses cost efficiency against income, unrelated to liquidity.

Why B is correct:

• Expenses to revenue ratio = total expenses / total revenue, which measures operational efficiency and profitability, not the liquidity needed to pay short-term debts like trade payables.

Why the others are wrong:

• A assesses short-term solvency by comparing current assets to current liabilities, including payables.
• C provides a stricter liquidity test by excluding inventory from current assets against current liabilities like payables.
• D measures days to collect receivables (365 / turnover ratio), showing cash inflow speed to fund payable payments.

Final answer: B