Chartered Financial Analyst (CFA) Level 1 Practice Exam

Which of the following ratios incorporates receivables into its calculation?

1. Quick Ratio

2. Cash Ratio

3. Defensive Interval Ratio

4. Debt-to-equity Ratio

The correct answer is: Defensive Interval Ratio

The correct answer is based on the fact that the Defensive Interval Ratio is designed to measure a company’s liquidity and its capability to cover its expenses and obligations using its liquid assets over a specific period of time. This ratio includes receivables because it assesses how easily a company can convert its assets into cash to meet short-term liabilities. In calculating the Defensive Interval Ratio, analysts often include accounts receivable as these assets are typically expected to be converted into cash in the near term when customers pay their outstanding invoices. This inclusion provides a clearer picture of liquidity since receivables, when collected, enhance a company’s cash flow. On the other hand, ratios like the Quick Ratio and the Cash Ratio focus more on a company’s immediate liquidity by considering different levels of liquid assets. The Quick Ratio includes receivables but emphasizes cash and other quick assets over inventory, while the Cash Ratio strictly focuses on cash and cash equivalents, excluding receivables entirely. The Debt-to-Equity Ratio, meanwhile, focuses on the capital structure of the company and does not take receivables into account at all as it compares total debt to total equity. Thus, the inclusion of receivables in the Defensive Interval Ratio calculation makes it the correct answer, as it is