Question

Which is not taken into consideration in Acid Test Ratio?

• A. Cash
• B. Bills receivable
• C. Stock
• D. None of these

Hint:

Remember: Quick Ratio = Current Assets – Inventory / Current Liabilities. Inventory is always excluded as it’s less liquid.

Answer 1

The Correct Option is C

Step 1: Understanding Acid Test Ratio.
The Acid Test Ratio, also known as the Quick Ratio, measures a firm’s ability to meet its short-term liabilities with its most liquid assets.
The formula is:
\[ \text{Acid Test Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} \]
This ratio excludes items that are not easily convertible into cash, such as stock or inventory.
Step 2: Reason for exclusion.
Stock or inventory is excluded because it may take time to sell, making it less liquid compared to other current assets like cash or receivables.
Step 3: Analysis of options.
- (1) Cash: Included — it is the most liquid asset.
- (2) Bills receivable: Included — can be quickly converted into cash.
- (3) Stock: Excluded — not easily liquidated, hence not part of the quick ratio.
- (4) None of these: Incorrect — stock is indeed excluded.
Step 4: Conclusion.
Hence, Stock is not taken into consideration while calculating the Acid Test Ratio.