Liquidity ratios — purpose and interpretation for short-term solvency (Choose the most comprehensive statement about why analysts compute liquidity ratios such as current ratio, quick ratio, and cash ratio.)

Introduction / Context:
Liquidity ratios help stakeholders assess whether a business can meet its short-term obligations without distress. Common measures include the current ratio, quick (acid-test) ratio, and cash ratio. This question asks for the most comprehensive reason analysts compute these ratios.

Given Data / Assumptions:

• Liquidity ratios relate current assets and current liabilities.
• They are used by managers, lenders, investors, and auditors.
• Time horizon is short term (typically within 12 months).

Concept / Approach:
Liquidity analysis focuses on coverage and convertibility. The current ratio evaluates broad coverage using all current assets. The quick ratio excludes inventories and prepaid items to emphasize assets readily convertible to cash. The cash ratio focuses purely on cash and cash equivalents versus current liabilities. Together, these ratios provide a layered perspective of solvency and a buffer against shocks.

Step-by-Step Solution:
1) Identify what each option states: (a) ability to meet obligations, (b) comparison of near-term claims vs resources, (c) insight into cash solvency and adverse scenarios.2) Recognize that practitioners compute liquidity ratios for all of these reasons, not just one.3) Therefore, the most complete answer is that liquidity ratios serve all listed purposes.

Verification / Alternative check:
Analyst guides routinely interpret current ratio = current assets / current liabilities, quick ratio = (current assets − inventories − prepaids) / current liabilities, and cash ratio = (cash + cash equivalents) / current liabilities to judge coverage and resilience.

Why Other Options Are Wrong:
Each of (a), (b), and (c) captures only part of the motivation; none alone is sufficiently complete compared with the combined statement in (d).

Common Pitfalls:
Assuming a single “correct” threshold (industry norms vary); ignoring seasonality; treating a high current ratio as always good despite possible inventory bloat or slow receivables.

Final Answer:
All of these