The most important difference between the 'quick' and 'current' ratios, in assessing an entity's short- term debt paying ability is:
A) the inclusion of current receivables in one and not the other.
B) the inclusion of inventory in one and not the other.
C) the inclusion of prepayments in one and not the other.
D) the inclusion of cash at bank in one and not the other.

Question

Quizplus · Accepted Answer

The most important difference between the 'quick' and 'current' ratios is the inclusion of inventory in the current ratio and not in the quick ratio. The current ratio includes inventory as a current asset, which may not be easily converted into cash, thereby overestimating the entity's short-term debt paying ability. The quick ratio, on the other hand, excludes inventory and includes only quick assets such as cash, accounts receivable, and short-term investments, which are more easily converted into cash. Therefore, the quick ratio provides a more accurate assessment of the entity's short-term debt paying ability.

The Most Important Difference Between the 'Quick' and 'Current' Ratios