The acid-test (quick) ratio
A) is used to quickly determine a company's solvency and long-term debt paying ability.
B) relates cash short-term investments and net receivables to current liabilities.
C) is calculated by taking one item from the income statement and one item from the balance sheet.
D) is the same as the current ratio except it is rounded to the nearest whole percent.

Question

Quizplus · Accepted Answer

The acid-test ratio, also known as the quick ratio, is calculated by dividing a company's current assets minus inventory by its current liabilities. It is used to determine a company's ability to meet its short-term obligations using assets that can be quickly converted to cash, such as cash, short-term investments, and net receivables. It does not take into account long-term debt or reflect a company's overall financial health. Option A is incorrect because solvency and long-term debt paying ability are better measured by ratios such as the debt-to-equity ratio or interest coverage ratio. Option C is incorrect because the acid-test ratio uses items solely from the balance sheet, not the income statement. Option D is incorrect because the acid-test ratio is not rounded to the nearest whole percent, but rather expressed as a decimal or a ratio.

The Acid-Test (Quick) Ratio