Liquidity problems are likely to exist when a company's acid-test ratio:
A) Is less than the current ratio.
B) Is 1 to 1.
C) Is higher than 1 to 1.
D) Is substantially lower than 1 to 1.
E) Is higher than the current ratio.

Question

Quizplus · Accepted Answer

The acid-test ratio measures a company's ability to pay off short-term liabilities with quick assets such as cash, marketable securities, and accounts receivable. A ratio substantially lower than 1 to 1 indicates that a company has insufficient quick assets to cover their short-term liabilities, which can lead to liquidity problems. Therefore, option D is the best choice as it suggests that the acid-test ratio is substantially lower than 1 to 1.

Liquidity Problems Are Likely to Exist When a Company's Acid-Test