The acid-test ratio differs from the current ratio in that it
A)represents the amount of cash on hand instead of the amount of working capital.
B)excludes inventories and accounts receivable from the numerator of the fraction because of obsolescence and possible nonpayment.
C)is a stricter test of a company's ability to pay its current debts as they are due.
D)signals the need to liquidate marketable securities when it drops below 5 to 1.

Question

Quizplus · Accepted Answer

The acid-test ratio is a stricter test of a company's ability to pay its current debts as they are due because it excludes inventories and accounts receivable from the numerator of the fraction. This means that it only includes the most liquid current assets such as cash and marketable securities, which are readily available for paying off debts.

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