What is the reason for computing the acid test ratio in addition to the current ratio?
A) inventory is the most liquid of the liquid assets.
B) a firm's inventory may not be particularly liquid.
C) inventory is the best collateral for short term loans.
D) compared to accounts receivable, inventory balances may be difficult to verify

Question

Quizplus · Accepted Answer

The acid test ratio, also known as the quick ratio, is a more stringent measure of a company's liquidity than the current ratio. It excludes inventory from the numerator because inventory may not be easily or quickly converted into cash. Therefore, option B is correct as inventory may not be particularly liquid, and is the reason for computing the acid test ratio in addition to the current ratio. Options A, C, and D are incorrect as they do not provide an adequate explanation for the purpose of computing the acid test ratio.

What Is the Reason for Computing the Acid Test Ratio