Which of the following the correct formula for calculating acid test ratio?
A) Acid test ratio = (Current assets - Inventory) / Current liabilities
B) Acid test ratio = (Current assets - Interest expense) / Current liabilities
C) Acid test ratio = (Current assets - Current liabilities) / Current liabilities
D) Acid test ratio = Current assets / Current liabilities

Question

Quizplus · Accepted Answer

The acid test ratio, also known as the quick ratio, measures a company's ability to pay off its current liabilities with its most liquid assets (cash, short-term investments, and accounts receivable). The formula for the acid test ratio subtracts the inventory, which is not considered a highly liquid asset, from the current assets before dividing by current liabilities.

Which of the Following the Correct Formula for Calculating Acid