Working capital metrics — identifying the correct definitions (Choose the single correct statement about key liquidity/profitability terms.)

Introduction / Context:
Liquidity analysis uses precisely defined ratios. Mis-definitions lead to poor decisions about cash sufficiency and risk. This item checks basic terminology by asking for the single correct statement.

Given Data / Assumptions:

• Current assets include cash, receivables, inventories, short-term investments, and prepaids.
• Current liabilities include obligations due within one operating cycle or 12 months.
• Operating profit (EBIT) excludes non-operating items.

Concept / Approach:
The current ratio definition is canonical: current assets divided by current liabilities. Operating profit equals gross profit minus operating expenses, not plus. The quick ratio excludes inventories and prepaids. A larger current ratio generally indicates a higher margin of safety, not lower, though interpretation depends on quality of assets.

Step-by-Step Solution:
1) Evaluate (a): Matches the standard formula.2) Evaluate (b): Direction is wrong; higher current ratio usually means greater liquidity.3) Evaluate (c): Sign is wrong; operating profit = gross profit − operating expenses.4) Evaluate (d): Quick ratio should exclude inventories; formula given is incorrect.

Verification / Alternative check:
Textbook definitions confirm current ratio = CA / CL and quick ratio = (CA − inventories − prepaids) / CL; operating profit is after subtracting operating expenses.

Why Other Options Are Wrong:
(b) reverses interpretation; (c) misstates the relationship; (d) includes inventories, contradicting the acid-test definition.

Common Pitfalls:
Equating a high current ratio with strong liquidity without checking receivable quality; treating inventories as equally liquid.

Final Answer:
Current ratio = current assets / current liabilities.