The acid-test ratio differs from the current ratio in that:
A)Liabilities are divided by current assets.
B)Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio.
C)The acid-test ratio is a measure of profitability but the current ratio does not.
D)The acid-test ratio excludes short-term investments from the calculation.
E)The acid-test ratio is a measure of liquidity but the current ratio is not.

Question

Quizplus · Accepted Answer

Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio, while they are included in the calculation of the current ratio. The acid-test ratio, also known as the quick ratio, provides a more conservative measure of liquidity by only considering the most liquid assets that can be quickly converted into cash to meet short-term obligations. However, the current ratio includes all current assets, including inventory and prepaid expenses, which may not be easily convertible into cash.

The Acid-Test Ratio Differs from the Current Ratio in That