Asked by Anshul Suryavanshi on May 23, 2024
Verified
The acid-test ratio differs from the current ratio in that:
A) Liabilities are divided by current assets.
B) Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio.
C) The acid-test ratio measures profitability and the current ratio does not.
D) The acid-test ratio excludes short-term investments from the calculation.
E) The acid-test ratio is a measure of liquidity but the current ratio is not.
Acid-test Ratio
A financial metric that measures a company's ability to pay off its current liabilities with its quick or liquid assets.
Current Ratio
A liquidity ratio that measures a company's ability to cover its short-term obligations with its current assets.
Liabilities
Financial obligations or debts owed by a business to others, which must be paid back.
- Differentiate between the acid-test ratio and current ratio.
Verified Answer
MC
Mikelle CarterMay 28, 2024
Final Answer :
B
Explanation :
The acid-test ratio, also known as the quick ratio, excludes prepaid expenses and inventory from the calculation, while the current ratio includes them. The acid-test ratio is a more conservative measure of liquidity because it only includes the most liquid assets, such as cash and accounts receivable, in the calculation.
Learning Objectives
- Differentiate between the acid-test ratio and current ratio.