Quick Ratio Measures Immediate Liquidity

Steps:

• Recall quick ratio formula: (Current assets - Inventory) / Current liabilities.
• Identify purpose: Assess ability to pay short-term debts using most liquid assets.
• Compare asset liquidity: Cash and receivables convert quickly; inventory takes longer via sales.
• Eliminate options not tied to liquidity speed.

Why C is correct:

• Quick ratio excludes inventory per its definition as the acid-test ratio, focusing on assets convertible to cash within 90 days, while inventory is slowest due to sales process.

Why the others are wrong:

• A: Inventory valuation methods like FIFO/LIFO affect balance sheet but not quick ratio's liquidity focus.
• B: Obsolescence risks inventory value but doesn't explain exclusion from quick ratio's immediate cash conversion test.
• D: Inventory value fluctuations impact accuracy but quick ratio prioritizes conversion speed over stability.

Final answer: C