Question

...... is also known as the Acid Test Ratio.

• A. Current ratio
• B. Quick ratio
• C. Gross profit ratio
• D. Return on investment ratio

Hint:

The quick ratio is a more stringent test of liquidity than the current ratio because it excludes inventory, which may not be easily convertible into cash.

Answer 1

The Correct Option is B

The quick ratio, also known as the acid test ratio, is a financial metric used to measure a company’s ability to meet its short-term liabilities with its most liquid assets. It is calculated as: \[ \text{Quick Ratio} = \frac{\text{Current Assets - Inventory}}{\text{Current Liabilities}} \] This ratio excludes inventory from current assets since inventory is less liquid compared to other current assets. The other options are defined as follows: Current ratio: Measures the ability to pay short-term obligations, including inventory, using current assets. Gross profit ratio: Indicates the profitability of a company based on sales revenue. Return on investment ratio: Measures the return generated on investments. Hence, the correct answer is (B) Quick ratio.