Question

Short-term assets minus accounts receivable and inventory, divided by short-term liabilities is called

• A. accrued interest
• B. assets
• C. annual report
• D. acid test

Hint:

The Acid-Test Ratio is considered more stringent than the Current Ratio because it excludes less liquid assets and focuses on resources that can be converted into cash quickly.

Answer 1

The Correct Option is D

Concept: This question is based on financial accounting and liquidity analysis. Liquidity ratios are used to determine whether a company can meet its short-term obligations using its readily available assets. One of the strictest liquidity measures is the Acid-Test Ratio, also known as the Quick Ratio.

Step 1: Understanding the Acid-Test Ratio.
The acid-test ratio measures the ability of a business to pay its current liabilities without relying on the sale of inventory. The ratio is generally represented as: \[ \text{Acid Test Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}} \] In the given question, the described formula corresponds to the acid-test concept.

Step 2: Examining the options.

• Accrued interest: Refers to interest accumulated but not yet paid or received. It is not a liquidity ratio.
• Assets: Assets are resources owned by a business. This is a broad accounting term rather than a specific ratio.
• Annual report: A yearly report containing financial and operational information of a company.
• Acid test: Correct. It is a liquidity measure that evaluates a company's immediate ability to meet short-term obligations.

Step 3: Conclusion.
Hence, the ratio described in the question is called the Acid Test Ratio.