Answer-Which of the following items is excluded from the numerator while calculating the Acid Test Ratio?

Q: Answer-Which of the following items is excluded from the numerator while calculating the Acid Test Ratio?

The Acid Test Ratio or Quick Ratio measures a firms 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 enterprises cash management in which case, they can be included in cash and cash equivalents.

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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.

Which of the following items is excluded from the

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