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 known as quick ratio) measures a company's ability to pay off its short-term debts without relying on the sale of inventory. A ratio substantially lower than 1 indicates a liquidity problem because the company may not have enough liquid assets to cover its short-term liabilities. Options A, B, and E are incorrect because they either don't provide enough information about the acid-test ratio or give incorrect interpretations of it. Option C is also incorrect because a ratio higher than 1 generally indicates better liquidity, not liquidity problems.

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