The acid-test ratio
A) is a quick calculation of an approximation of the current ratio.
B) does not include all current liabilities in the calculation.
C) does not include inventory as part of the numerator.
D) does include prepaid expenses as part of the numerator.

Question

Quizplus · Accepted Answer

The acid-test ratio (also known as the quick ratio) is a measure of a company's ability to pay off its current liabilities using only its most liquid assets, such as cash, marketable securities, and accounts receivable. It does not include inventory in the numerator as inventory may not be easily converted into cash in the short-term. It also does not include prepaid expenses as part of the numerator. While the acid-test ratio is similar to the current ratio in that it both measures a company's ability to pay off its current liabilities, the acid-test ratio is considered a more conservative measure as it excludes inventory which may not be easily sold off in the short-term.

The Acid-Test Ratio