Question

Because of exclusion of non-liquid current assets which of the following ratio is considered better than current ratio as a measure of liquidity position of business?

• A. Debt Equity Ratio
• B. Acid Test Ratio
• C. Proprietary Ratio
• D. Interest Coverage Ratio

Hint:

Acid Test Ratio = (Current Assets – Inventory – Prepaid Expenses) ÷ Current Liabilities; provides a stricter liquidity measure than Current Ratio.

Answer 1

The Correct Option is B

The Acid Test Ratio (or Quick Ratio) measures a firm's ability to meet its short-term obligations without relying on the sale of inventory or other less liquid current assets such as prepaid expenses. It includes only the most liquid assets — cash, marketable securities, and receivables. This makes it a more stringent and reliable indicator of liquidity compared to the current ratio, which includes inventory and prepaid expenses that might not be quickly convertible into cash.