The two basic measures of liquidity are:

Liquidity refers to a firm's ability to meet its short-term obligations as they become due. The two fundamental ratios used to measure this are the Current Ratio and the Quick Ratio.

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

This ratio measures whether current assets are sufficient to pay off current liabilities. It includes all current assets (cash, debtors, inventory, etc.).

Quick Ratio (Acid Test Ratio) = $\frac{\text{Current Assets - Inventory - Prepaid Expenses}}{\text{Current Liabilities}}$

This is a more stringent test of liquidity as it excludes inventory and prepaid expenses, which may not be easily convertible to cash. It focuses on liquid assets only.

The other options include ratios that serve different purposes:

• Inventory Turnover → Measures efficiency in managing inventory (Activity ratio)
• Gross Profit Margin & Operating Ratio → Measure profitability, not liquidity
• Average Collection Period → Measures efficiency of credit collection (Activity ratio)

While average collection period does provide some insight into how quickly receivables convert to cash, it is not classified as one of the two basic measures of liquidity. The Current Ratio and Quick Ratio are universally recognized as the primary liquidity indicators.