All but one of the following is true about quick ratios.
A) The quick ratio is calculated by dividing the most liquid of current assets by current liabilities.
B) Service companies that tend not to carry too much inventory will see significantly higher quick ratios than current ratios.
C) Inventory, being not very liquid, is subtracted from total current assets to determine the most liquid assets.
D) Quick ratios will tend to be much smaller than current ratio for manufacturing companies or other industries that have a lot of inventory.

Question

Quizplus · Accepted Answer

The quick ratio, also known as the acid-test ratio, is calculated by dividing the most liquid of current assets (such as cash and accounts receivable) by current liabilities. Inventory, being less liquid, is excluded from the calculation. Service companies that tend not to carry too much inventory will have higher quick ratios than current ratios, which include inventory in the calculation. Option A is incorrect because it is the definition of the quick ratio. Option C is incorrect because inventory is excluded, not subtracted, from the quick ratio calculation. Option D is incorrect because it suggests that manufacturing companies will have lower quick ratios, which is true, but it is not inclusive of all industries that have a lot of inventory.

All but One of the Following Is True About Quick