Liquidity problems are likely to exist for a company when its acid-test ratio
A)Is less than the industry average
B)Is lower than 1 to 1
C)Is higher than 1 to 1
D)Is 1 to 1
E)Is both less than the industry average and lower than 1 to 1

Question

Quizplus · Accepted Answer

The acid-test ratio measures a company's ability to pay off its short-term obligations with its most liquid assets. A ratio lower than 1 to 1 means that the company has less liquid assets than its current liabilities, making it difficult to meet its short-term obligations. Therefore, if a company's acid-test ratio is lower than 1 to 1, it is likely to have liquidity problems.

Liquidity Problems Are Likely to Exist for a Company When