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

One of the most important assumptions behind the calculation of the quick (acid test) ratio is that:

Inventory can be sold immediately at full value.

Prepaid expenses are highly liquid assets.

Accounts receivable can be quickly converted into cash at their stated value.

All current liabilities are due in more than one year.

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Verified step by step guidance

Understand the quick (acid test) ratio: It is a measure of a company's ability to meet its short-term obligations using its most liquid assets, excluding inventory.

Identify the components of the quick ratio formula: Quick assets include cash, cash equivalents, marketable securities, and accounts receivable. The formula is:

\frac{(Cash + Marketable Securities + Accounts Receivable)}{Current}

Analyze the assumption about accounts receivable: The quick ratio assumes that accounts receivable can be quickly converted into cash at their stated value, meaning they are considered highly liquid assets.

Evaluate why inventory and prepaid expenses are excluded: Inventory is excluded because it may not be sold immediately at full value, and prepaid expenses are excluded because they are not liquid assets—they cannot be converted into cash quickly.

Understand the relevance of current liabilities: The quick ratio focuses on liabilities that are due within one year, not those due in more than one year, as it measures short-term liquidity.