Asked by Keletso J. Letsholo on Jun 29, 2024
Verified
If the acid-test ratio is less than one, then paying off some current liabilities with cash will increase the acid-test (quick) ratio.
Acid-Test Ratio
A stringent test that indicates whether a company has enough short-term assets to cover its immediate liabilities without selling inventory.
Current Liabilities
Current liabilities are a company's debts or obligations that are due within one year.
- Understand the consequences of financial transactions on liquidity and efficiency ratios, such as the quick ratio and the average time of sales/collections.
Verified Answer
PK
Pouya KouzehkananiJun 30, 2024
Final Answer :
False
Explanation :
Paying off current liabilities with cash decreases both current liabilities and current assets (cash), but since cash is part of the quick assets, the numerator in the acid-test ratio decreases, potentially leaving the ratio unchanged or even lower, not necessarily increasing it.
Learning Objectives
- Understand the consequences of financial transactions on liquidity and efficiency ratios, such as the quick ratio and the average time of sales/collections.
Related questions
A Company Could Improve Its Acid-Test Ratio by Selling Some ...
As the Accounts Receivable Turnover Ratio Decreases, the Average Collection ...
Norton Incorporated Could Improve Its Current Ratio of 2 By ...
The Seabury Corporation Has a Current Ratio of 4 ...
Data from Fontecchio Corporation's Most Recent Balance Sheet Appear Below ...