The quick ratio is considered more useful than the current ratio for:
A) Evaluating the profitability of a business that sells inventory very quickly, such as a restaurant.
B) Evaluating the solvency of a business that turns inventory into cash very slowly, such as a shipbuilder.
C) Evaluating long-term credit risk.
D) Evaluating investors' expectations concerning future earnings.

Question

Quizplus · Accepted Answer

The quick ratio, also known as the acid-test ratio, is a measure of a company's ability to cover its short-term liabilities with its most liquid assets. It excludes inventory from current assets as it is considered less liquid and may take longer to convert to cash. Therefore, it is more useful for evaluating the solvency of a business that turns inventory into cash slowly, such as a shipbuilder, where inventory may sit for months before being sold. In contrast, a restaurant would sell inventory quickly, making the current ratio more useful for evaluating profitability. The quick ratio is not useful for evaluating long-term credit risk or investor expectations concerning future earnings.

The Quick Ratio Is Considered More Useful Than the Current