Asked by Damario Thompson on May 20, 2024
Verified
An example of a guideline (or rule of thumb)for comparison is the 2:1 level for the current ratio and 1:1 level for the acid-test ratio.
Current Ratio
A liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year.
Acid-test Ratio
A financial metric used to evaluate a company's short-term liquidity position by comparing its most liquid assets (excluding inventory) to its current liabilities.
- Comprehend the significance of using standards and guidelines for financial comparison.
Verified Answer
MJ
Mattin JoshuaMay 23, 2024
Final Answer :
True
Explanation :
The 2:1 level for the current ratio and 1:1 level for the acid-test ratio are commonly used guidelines or rules of thumb for financial analysis. The current ratio compares a company's current assets to its current liabilities, while the acid-test ratio only includes the most liquid current assets (such as cash and accounts receivable) in its calculation. Both ratios are used to assess a company's ability to meet its short-term financial obligations.
Learning Objectives
- Comprehend the significance of using standards and guidelines for financial comparison.