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

The acid-test (quick) ratio is different from the current ratio in that it:

excludes inventory from current assets in the numerator

includes all current assets and current liabilities

is always higher than the current ratio

measures a company's profitability

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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 short-term liquidity by measuring its ability to pay off current liabilities using its most liquid assets, excluding inventory.

Compare the acid-test (quick) ratio to the current ratio: The current ratio includes all current assets (such as cash, accounts receivable, and inventory) in the numerator, while the acid-test ratio excludes inventory because inventory is less liquid and may take time to convert into cash.

Identify the formula for the acid-test (quick) ratio: The formula is \( \text{Acid-test ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}} \). This formula highlights the exclusion of inventory from the numerator.

Analyze why inventory is excluded: Inventory is excluded because it may not be readily convertible to cash in the short term, making it less reliable for immediate liquidity needs.

Clarify the purpose of the acid-test (quick) ratio: It is designed to provide a more conservative measure of liquidity compared to the current ratio, focusing on assets that can be quickly converted into cash to meet short-term obligations.