Which financial metric gauges a local government's ability to cover current obligations with current assets?

Which financial metric gauges a local government's ability to cover current obligations with current assets?

• A. The current ratio (current assets divided by current liabilities).
• B. Net present value.
• C. Return on investment.
• D. Quick ratio.

Answer: (A)

Liquidity in the near term is shown by the current ratio, which compares current assets to current liabilities. This metric directly reflects how easily a local government can cover its short-term obligations with assets that are expected to be converted to cash within a year, such as cash, receivables, and short‑term investments versus payables and other short‑term debts. A ratio above 1 indicates there are enough current assets to meet current obligations, signaling solid short-term liquidity. Net present value looks at the profitability of a specific project over time, not the government's ability to pay its bills right now. Return on investment measures how effectively invested funds generate returns, which is about performance of investments rather than immediate liquidity. The quick ratio is similar but more conservative because it excludes inventory; many local governments hold little to no inventory, so the broader current ratio is the clearer gauge of ability to cover current obligations with current assets.

Liquidity in the near term is shown by the current ratio, which compares current assets to current liabilities. This metric directly reflects how easily a local government can cover its short-term obligations with assets that are expected to be converted to cash within a year, such as cash, receivables, and short‑term investments versus payables and other short‑term debts. A ratio above 1 indicates there are enough current assets to meet current obligations, signaling solid short-term liquidity.

Net present value looks at the profitability of a specific project over time, not the government's ability to pay its bills right now. Return on investment measures how effectively invested funds generate returns, which is about performance of investments rather than immediate liquidity. The quick ratio is similar but more conservative because it excludes inventory; many local governments hold little to no inventory, so the broader current ratio is the clearer gauge of ability to cover current obligations with current assets.