The most rigorous test of a firm's ability to pay its short-term obligations is its
A) current ratio.
B) quick ratio.
C) debt-to-assets ratio.
D) times-interest-earned ratio.

Question

Quizplus · Accepted Answer

The quick ratio, also known as the acid-test ratio, is the most rigorous test of a firm's ability to pay its short-term obligations because it excludes inventory from current assets, which may not be easily convertible to cash in the short-term. This ratio only considers the most liquid assets (cash, marketable securities, and accounts receivable) and compares them to current liabilities, providing a more conservative view of a company's ability to pay its debts.

The Most Rigorous Test of a Firm's Ability to Pay