Answer (D) is correct . Liquidity ratios measure a firm’s ability to pay its obligations in the short term and thus to continue operations. Examples include the current ratio and acid test (quick) ratio. Activity ratios measure the firm’s use of assets to generate revenue and income. Examples include inventory turnover, average collection period, and receivables turnover. Times interest earned is a ratio that measures the firm’s ability to cover its interest burden.
Answer (A) is incorrect because Average collection period in days is an activity ratio.
Answer (B) is incorrect because Merchandise inventory turnover is an activity ratio.
Answer (C) is incorrect because Accounts receivable turnover is an activity ratio.
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