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

If a company has inventory, the quick (acid test) ratio will always be ______ the current ratio.

unrelated to

greater than

equal to

less than

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Verified step by step guidance

Understand the concept of the current ratio: The current ratio is calculated as Current Assets divided by Current Liabilities. It includes all current assets, such as cash, accounts receivable, and inventory.

Understand the concept of the quick (acid test) ratio: The quick ratio is calculated as (Current Assets - Inventory) divided by Current Liabilities. It excludes inventory because inventory is considered less liquid compared to other current assets.

Compare the formulas: Since the quick ratio excludes inventory, it will always be less than or equal to the current ratio. This is because inventory is a part of current assets, and removing it reduces the numerator in the quick ratio formula.

Analyze the relationship: The quick ratio focuses on the most liquid assets, while the current ratio includes all current assets. Therefore, the quick ratio will always be less than the current ratio if inventory is present.

Conclude the answer: Based on the comparison and analysis, the quick (acid test) ratio will always be less than the current ratio when inventory is included in the current assets.