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The following table contains selected financial information for Tougher Question, Inc.
Calculate the quick ratio for TQ, Inc.
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14. Financial Statement Analysis
Ratios: Quick (Acid Test) Ratio
Multiple Choice
Which of the following ratios is commonly used to measure a company's liquidity by excluding inventory from current assets?
A
Gross Profit Margin
B
Debt-to-Equity Ratio
C
Quick (Acid Test) Ratio
D
Inventory Turnover Ratio
Verified step by step guidance1
Understand the concept of liquidity: Liquidity refers to a company's ability to meet its short-term obligations using its most liquid assets. Ratios measuring liquidity focus on current assets and liabilities.
Learn about the Quick (Acid Test) Ratio: This ratio excludes inventory from current assets because inventory is considered less liquid compared to cash, accounts receivable, or other current assets.
Formula for Quick (Acid Test) Ratio: The formula is \( \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} \). This ensures only the most liquid assets are considered.
Identify why inventory is excluded: Inventory may take time to convert into cash, and its value can fluctuate, making it less reliable for immediate liquidity needs.
Compare with other ratios: Gross Profit Margin measures profitability, Debt-to-Equity Ratio assesses financial leverage, and Inventory Turnover Ratio evaluates inventory management efficiency. None of these focus on liquidity in the same way as the Quick Ratio.
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