Liquidity problems are likely to exist when a company's acid-test ratio is:
A)Less than the current ratio.
B)1 to 1.
C)Higher than 1 to 1.
D)Substantially lower than 1 to 1.
E)Higher than the current ratio.

Question

Quizplus · Accepted Answer

The acid-test ratio (also known as the quick ratio) is a stricter measure of liquidity than the current ratio because it excludes inventory, which may not be easily convertible to cash. A ratio substantially lower than 1 to 1 indicates that the company may have difficulty meeting its short-term obligations with its current assets. Therefore, Option D is the best choice.

Liquidity Problems Are Likely to Exist When a Company's Acid-Test