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 ratios is commonly used to measure a company's liquidity by excluding inventory from current assets?

Gross Profit Margin

Debt-to-Equity Ratio

Quick (Acid Test) Ratio

Inventory Turnover Ratio

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Verified step by step guidance

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.