The acid-test ratio differs from the current ratio
A)Because it excludes prepaid expenses and inventory
B)Because liabilities are divided by current assets
C)Because it measures profitability
D)Because it excludes short-term investments
E)Because it excludes prepaid expenses and inventory and because it measures profitability

Question

Quizplus · Accepted Answer

The acid-test ratio, unlike the current ratio, excludes certain current assets such as inventory and prepaid expenses from its calculation because these assets are not as easily converted into cash within a short period. This makes the acid-test ratio a stricter measure of a company's short-term liquidity compared to the current ratio.

The Acid-Test Ratio Differs from the Current Ratio