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

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

Which of the following ratios is most useful in evaluating a company's liquidity by excluding inventory from current assets?

Quick (Acid Test) Ratio

Gross Profit Margin

Inventory Turnover Ratio

Debt-to-Equity Ratio

Previous problemNext problem

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 that focus on current assets are typically used to evaluate liquidity.

Identify 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. The formula for the Quick Ratio is: Quick Ratio = (Current Assets - Inventory) / Current Liabilities.

Compare the other ratios: Gross Profit Margin measures profitability, not liquidity. Inventory Turnover Ratio evaluates how efficiently inventory is managed, but does not directly assess liquidity. Debt-to-Equity Ratio measures financial leverage, not liquidity.

Focus on the Quick Ratio: Since the Quick Ratio specifically excludes inventory and focuses on the most liquid assets, it is the most appropriate ratio for evaluating liquidity in this context.

Conclude that the Quick (Acid Test) Ratio is the correct answer because it directly addresses the company's ability to meet short-term obligations without relying on inventory.