The acid-test ratio differs from the current ratio in that:
A) The acid-test ratio measures profitability and the current ratio does not.
B) The acid-test ratio excludes short-term investments from the calculation.
C) The acid-test ratio is a measure of liquidity but the current ratio is not.
D) Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio.
E) Liabilities are divided by current assets.

Question

Quizplus · Accepted Answer

The acid-test ratio, also known as the quick ratio, excludes inventory and prepaid expenses from its calculation. The current ratio, on the other hand, includes all current assets and current liabilities in its calculation. Neither ratio measures profitability, and both are measures of liquidity. However, the acid-test ratio is considered a more conservative measure of liquidity because it excludes inventory, which may not be easily convertible to cash in a short period of time.

The Acid-Test Ratio Differs from the Current Ratio in That