Liquidity problems exist for a company when its acid-test ratio:
A) Is less than the industry average.
B) Is 1 to 1.
C) Is higher than 1 to 1.
D) Is lower than 1 to 1.
E) Is less than the industry average and is lower than 1 to 1.

Question

Quizplus · Accepted Answer

The acid-test ratio is a measure of a company's ability to pay its current liabilities with its current assets excluding inventory. A ratio lower than 1 to 1 indicates that the company may have difficulty in meeting its short-term obligations with its available liquid assets. Therefore, option D is the correct answer as it states that the company may have liquidity problems if its acid-test ratio is lower than 1 to 1.

Liquidity Problems Exist for a Company When Its Acid-Test Ratio