The acid-test ratio is another important ratio we can examine, although it always does seek to...

The acid-test ratio is another important ratio we can examine, although it always does seek to measure liquidity within a business. Overall, why do you think liquidity is such an important area of consideration for a business?

Expert Solution

The Acid - test ratio is also called the quick ratio,

The formula for quick ratio : (current assets - inventory) / current liabilities

Yes, the acid test ratio measures the liquidity in the business. It measures the ability of a company to use its near cash or quick assets to pay off its current liabilities immediately. The quick ratio measures your ability to access cash quickly to support immediate demands. A ratio of 1.0 or greater is generally acceptable, but this can vary depending on your industry.

liquidity is such an important area of consideration for a business because:

It measures the ability of the business to pay off it's current liabilities as and when it becomes due.
As we evaluate investments, we consider the overall financial situation, liquidity can be an important factor. Liquidity is the ability to convert assets quickly into cash without affecting it's value.
It determines the ability of the business to cover debts which indicates its overall financial health.

jeff jeffy answered 1 year ago

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