Analysts use the quick ratio (also known as the acid test ratio)and the current ratio.The use of both ratios has become common because
A)the quick ratio is much easier to compute than the current ratio
B)interpretation of the current ratio is more difficult because of its complexity
C)the acid test is a more severe test of a company's liquidity
D)the acid test a better measure of management's effectiveness

Question

Quizplus · Accepted Answer

The acid test ratio (or quick ratio) is a more severe test of a company's liquidity because it only includes the most liquid assets in the numerator (cash, marketable securities, and accounts receivable), while excluding inventory and prepaid expenses. This means that it gives a more conservative measure of a company's ability to meet its current liabilities. Therefore, using both the current ratio and quick ratio provides a more complete picture of a company's liquidity position. Options A, B, and D are incorrect as they do not accurately reflect the reasons for using both ratios.

Analysts Use the Quick Ratio (Also Known as the Acid