Question

A certain company has an acid test ratio of 0.97. This implies which of the following?1. Current liabilities are less than the quick assets of the company.
2. Current liabilities are greater than the quick assets of the company.
3. Current liabilities are greater than the current assets of the company.
4. Current liabilities are less than the current assets of the company.

Answer 1

Answer: 2. Current liabilities are greater than the quick assets of the company.

Explanation:

The acid-test ratio is a method of checking if the company has enough quick assets ( most liquid current assets) to enable it cover its current liabilities.

It is calculated by dividing the current assets less the inventory by the current liabilities. A ratio of 0.97 therefore means that the denominator which are the current liabilities are more than the quick assets of the company.