Which of the following items is excluded from the

Solution

The Acid Test Ratio or Quick Ratio measures a firm's ability to meet its current liabilities using Quick Assets. It is a liquidity ratio. Although Prepaid Insurance is a short term current asset, it is not a liquid asset. Prepaid Insurance is excluded because it cannot be converted back into cash to pay off creditors; it only represents a future service already paid for.   Sundry debtors are accounts receivables which is a current asset.   Treasury bills and Certificate of Deposits represent cash equivalents and are included.    Note - cash equivalents are defined as: “Short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Bank overdrafts are generally considered a part of financing activities, unless they are repayable on demand and are an integral part of an enterprise’s cash management — in which case, they can be included in cash and cash equivalents.