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

Question

Quizplus · Accepted Answer

The quick ratio, also known as the acid-test ratio, excludes inventory and prepaid expenses from the calculation. This is because these assets may not be easily converted to cash in order to meet short-term financial obligations. The current ratio, on the other hand, includes these assets in the calculation. The quick ratio is not a measure of profitability, but rather a measure of a company's ability to meet short-term liabilities with its most liquid assets. Therefore, the correct answer is B, as it correctly states that prepaid expenses and inventory are excluded from the calculation.

The Quick Ratio Differs from the Current Ratio