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 quick (acid test) ratios is generally considered the most desirable for a company, indicating sufficient liquidity without excessive idle assets?

2:1

0.2:1

0.5:1

1:1

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Verified step by step guidance

Understand the concept of the quick (acid test) ratio: It measures a company's ability to meet its short-term obligations using its most liquid assets, excluding inventory. The formula is Quick Ratio = (Current Assets - Inventory) / Current Liabilities.

Recognize that a desirable quick ratio indicates sufficient liquidity to cover liabilities without excessive idle assets. A ratio of 1:1 means the company has exactly enough liquid assets to cover its current liabilities.

Evaluate the given options: A ratio of 2:1 suggests excessive idle assets, which may not be efficient. Ratios of 0.2:1 and 0.5:1 indicate insufficient liquidity to cover liabilities.

Conclude that the most desirable quick ratio is 1:1, as it balances liquidity and efficiency, ensuring the company can meet obligations without holding excessive liquid assets.

Apply this understanding to similar problems by analyzing the quick ratio formula and interpreting the implications of different values for liquidity and asset management.