alleryStart learning →How does the acid-test ratio differ from the current ratio?
AIt adds the fixed assets to the numerator
BIt excludes inventory from the numerator
CIt excludes the notes payable from the base
DIt uses total assets in place of current ones
Answer & Solution
Correct answer: B. It excludes inventory from the numerator
1. The acid-test or quick ratio works like the current ratio but excludes inventory.
2. Inventory is the least-liquid current asset, so removing it is a harsher test.
3. The ratio therefore measures the ability to pay current liabilities without selling inventory.
4. The denominator is unchanged: total current liabilities stay whole, so nothing is stripped from the bottom of the fraction.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.7 Analyzing Financial Statements_
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