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    Question

    The Quick Ratio (or Acid-Test Ratio) is a more stringent

    measure of liquidity than the Current Ratio because it:
    A Includes all current assets. Correct Answer Incorrect Answer
    B Excludes inventory and other less liquid current assets. Correct Answer Incorrect Answer
    C Focuses on long-term solvency. Correct Answer Incorrect Answer
    D Considers marketable securities at their cost price. Correct Answer Incorrect Answer

    Solution

    The Quick Ratio is calculated as (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities. It excludes inventory because it is typically the least liquid current asset and may not be easily convertible to cash in the short term to meet immediate obligations. This makes it a more conservative test of short-term liquidity.

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