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 measures profitability and 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

The acid-test ratio, also known as the quick ratio, is calculated by dividing current assets minus inventory and prepaid expenses by current liabilities. This ratio only includes assets that can be quickly converted to cash, which excludes inventory and prepaid expenses. The current ratio, on the other hand, includes all current assets in the calculation.

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