Minnie knows that Double Entry has a lot of short-term debt coming due in the next year, and wants to make sure that the company will have the ability to make the required payments. Given a troubling downturn in construction activity over the past couple of months, she is not confident that Double Entry can count on selling its current inventory of doors before the debt comes due. Which of the following ratios would be most relevant to Minnie?
A) current ratio
B) debt to equity ratio
C) return on sales
D) acid-test ratio

Question

Quizplus · Accepted Answer

Liquidity ratios, such as the current ratio and the acid-test ratio, are calculated to provide insight into the ability of firms to meet their short-term debt obligations. They do this by comparing current assets (which are expected to convert into cash in the next year) to current liabilities (which must be paid within the year). In a situation where a firm may have difficulty selling its inventory, the acid-test ratio is a better measure of liquidity because the acid-test ratio excludes inventory from the calculation.

Minnie Knows That Double Entry Has a Lot of Short-Term