Liquidity problems are likely to exist when a company's acid-test ratio:
A)Is less than the current ratio.
B)equals 1.
C)Is higher than 1.
D)Is substantially lower than 1.
E)Is higher than the current ratio.

Question

Quizplus · Accepted Answer

The acid-test ratio (also called the quick ratio) measures a company's ability to pay its short-term obligations with its most liquid assets. A ratio substantially lower than 1 (usually below 0.5) indicates the company has difficulties meeting its short-term liabilities, which could signify a liquidity problem. Options A, B, and E do not necessarily indicate liquidity problems, while option C indicates the company has more liquid assets than short-term liabilities, thus indicating good liquidity.

Liquidity Problems Are Likely to Exist When a Company's Acid-Test