The two basic measures of liquidity are:

Liquidity refers to the ability of a business to meet its short-term financial obligations. The two basic measures of liquidity are:

Current Ratio = $\frac{\text{Current Assets}}{\text{Current Liabilities}}$

This ratio measures the overall ability to pay current liabilities using all current assets.

Liquid Ratio (Quick Ratio) = $\frac{\text{Liquid Assets}}{\text{Current Liabilities}}$

where Liquid Assets = Current Assets - Inventory - Prepaid Expenses

This ratio measures the ability to pay current liabilities using only the most liquid assets (excluding inventory and prepaid expenses which cannot be quickly converted to cash).

The other options include ratios that are not liquidity measures:

• Inventory Turnover is an activity ratio that measures how efficiently inventory is managed
• Trade Receivable Turnover is an activity ratio that measures the efficiency of credit collection
• Average Collection Period is an activity ratio that measures the time taken to collect receivables

These activity ratios help analyze operational efficiency but do not directly measure the ability to meet short-term obligations, which is the purpose of liquidity ratios.