How does the current ratio differ from the quick ratio?

The current ratio is an important financial metric that gauges a company's ability to meet its short-term obligations by comparing its current assets to its current liabilities. Specifically, it includes all current assets—such as cash, accounts receivable, inventory, and other short-term assets—providing a broad overview of financial liquidity.

The quick ratio, on the other hand, focuses on more liquid assets by excluding inventory from current assets. This is crucial because inventory may not be as quickly convertible to cash as other asset types, thus providing a more conservative view of a company’s liquidity. By focusing only on cash, receivables, and other liquid assets, the quick ratio presents an assessment of financial health under tighter conditions, where immediate liquidity is essential.

Through this distinction, understanding that the current ratio provides a wider scope of asset evaluation while the quick ratio zeroes in on immediate liquid assets helps to illustrate the differences between the two ratios, making it clear why the first choice is the correct answer.