CAF-7 · Chapter 12 · Question 3 of 15
When assessing a company's short-term liquidity, why is the Quick Ratio (Acid Test Ratio) often considered a more severe and accurate test than the Current Ratio?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Because it excludes inventory, which is often the least liquid of the current assets
Explanation
The Quick Ratio excludes inventory from current assets because inventory can take a significant amount of time to sell and convert into cash. Therefore, removing it provides a stricter test of the company's immediate ability to pay its debts.
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