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 is NOT a correct way of calculating a liquidity ratio?

Current Ratio = \frac{Current\ Assets}{Current\ Liabilities}

Cash Ratio = \frac{Cash + Marketable\ Securities}{Current\ Liabilities}

Debt-to-Equity Ratio = \frac{Total\ Liabilities}{Shareholders'\ Equity}

Quick Ratio = \frac{Current\ Assets - Inventory}{Current\ Liabilities}

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Verified step by step guidance

Step 1: Understand the concept of liquidity ratios. Liquidity ratios measure a company's ability to meet its short-term obligations using its most liquid assets. Common liquidity ratios include the Current Ratio, Quick Ratio, and Cash Ratio.

Step 2: Review the formulas provided in the problem. The formulas for Current Ratio, Cash Ratio, and Quick Ratio are valid liquidity ratios because they focus on the relationship between liquid assets and current liabilities.

Step 3: Analyze the Debt-to-Equity Ratio formula. This ratio is calculated as \( \frac{\text{Total Liabilities}}{\text{Shareholders' Equity}} \). It measures a company's financial leverage rather than its liquidity, making it unrelated to liquidity ratios.

Step 4: Compare the purpose of liquidity ratios versus the Debt-to-Equity Ratio. Liquidity ratios assess short-term financial health, while the Debt-to-Equity Ratio evaluates long-term financial structure and risk.

Step 5: Conclude that the Debt-to-Equity Ratio is NOT a correct way of calculating a liquidity ratio, as it does not measure the company's ability to meet short-term obligations.