Which ratio is commonly known as the Acid Test Ratio?

Which ratio is commonly known as the Acid Test Ratio?

• A. Current Ratio
• B. Quick Ratio
• C. Acid Test Ratio
• D. Debt to Equity

Answer: (B)

The acid-test ratio measures immediate liquidity by focusing only on assets that can be quickly converted to cash, excluding inventory because inventory isn’t always readily saleable to meet short-term obligations. It looks at cash, marketable securities, and accounts receivable relative to current liabilities, giving a picture of how well a company can cover short-term debts without relying on selling inventory. That’s why this ratio is commonly known as the quick ratio—the acid-test is simply another name for it. In practice, you’ll see the quick ratio written as (cash + marketable securities + accounts receivable) / current liabilities, or equivalently (current assets minus inventory) / current liabilities. The key idea is the same: a stricter measure of liquidity than the current ratio, which includes all current assets (including inventory). The other options don’t fit because the current ratio uses all current assets, including inventory; the debt-to-equity ratio measures leverage rather than liquidity; and the acid-test ratio is not a separate category from the quick ratio but another name for it.

The acid-test ratio measures immediate liquidity by focusing only on assets that can be quickly converted to cash, excluding inventory because inventory isn’t always readily saleable to meet short-term obligations. It looks at cash, marketable securities, and accounts receivable relative to current liabilities, giving a picture of how well a company can cover short-term debts without relying on selling inventory. That’s why this ratio is commonly known as the quick ratio—the acid-test is simply another name for it.

In practice, you’ll see the quick ratio written as (cash + marketable securities + accounts receivable) / current liabilities, or equivalently (current assets minus inventory) / current liabilities. The key idea is the same: a stricter measure of liquidity than the current ratio, which includes all current assets (including inventory).

The other options don’t fit because the current ratio uses all current assets, including inventory; the debt-to-equity ratio measures leverage rather than liquidity; and the acid-test ratio is not a separate category from the quick ratio but another name for it.