What is the reason for computing the acid-test ratio in addition to the current ratio?
A)Inventory is the most liquid of the liquid assets.
B)A firm's inventory may not be particularly liquid.
C)Inventory is the best collateral for short term loans.
D)Compared to accounts receivable, inventory balances may be difficult to verify.

Question

Quizplus · Accepted Answer

The acid-test ratio, also known as the quick ratio, is computed by subtracting inventory from current assets and then dividing by current liabilities. This ratio only includes the most liquid of a company's assets, excluding inventory, because inventory may not be particularly easy to convert to cash quickly. Therefore, by computing the acid-test ratio in addition to the current ratio, investors and analysts can get a more accurate picture of a company's liquidity and ability to meet short-term obligations.

What Is the Reason for Computing the Acid-Test Ratio in Addition