Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Quick (Acid Test) Ratio

Financial Accounting

14. Financial Statement Analysis

Ratios: Quick (Acid Test) Ratio

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Multiple Choice

Which of the following best summarizes what the acid-test (quick) ratio measures?

The proportion of total assets financed by long-term debt.

The ability of a company to pay its current liabilities using only its most liquid assets, excluding inventory.

The profitability of a company after accounting for all expenses.

The efficiency with which a company uses its assets to generate sales.

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Verified step by step guidance

Understand the concept of the acid-test (quick) ratio: It is a financial metric used to evaluate a company's ability to meet its short-term liabilities using its most liquid assets, excluding inventory.

Identify the components of the acid-test ratio: Liquid assets typically include cash, marketable securities, and accounts receivable. Inventory is excluded because it is less liquid and may not be readily converted to cash.

Recognize the formula for the acid-test ratio: Acid-test ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. This formula helps measure the company's immediate liquidity position.

Analyze the purpose of the acid-test ratio: It provides insight into whether a company can cover its current liabilities without relying on the sale of inventory, which may take time or be uncertain.

Compare the options provided in the problem: The correct answer is the one that aligns with the definition and purpose of the acid-test ratio, which is 'The ability of a company to pay its current liabilities using only its most liquid assets, excluding inventory.'