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?

Solutions

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

Next > < Previous

Related Solutions

If a firm has a high current ratio but a low acid-test ratio, one can conclude...

If a firm has a high current ratio but a low acid-test ratio, one can conclude that: a the firm has a large outstanding accounts receivable balance. b the firm has a large investment in inventory. c the firm has a large amount of current liabilities. d the firm's financial leverage is very high.

The variances issue is easy as we can always assume they are different as the test...

The variances issue is easy as we can always assume they are different as the test is robust to accept any variances but the dependent pairs is different. Why is it different and how might you use it?

What do you think, does the auditor always need to engage another independent specialist to test...

What do you think, does the auditor always need to engage another independent specialist to test the work of the specialist hired by the organization to determine the value of the tangible assets other than goodwill? Explain, incorporating the idea of the importance of auditor professional skepticism.

What is its acid-test (quick) ratio?

A company has cash of $100 million, accounts receivable of $600 million, current assets of $1.2 billion, accounts payable of $400 million, and current liabilities of $900 million. What is its acid-test (quick) ratio?

Assuming a current ratio of 1.4 and an acid-test ratio of 0.78, how will the cash...

Assuming a current ratio of 1.4 and an acid-test ratio of 0.78, how will the cash payment of Prepaided Insurance affect each ratio? Increase the current ratio and increase the acid-test ratio No change to the current ratio and decrease the acid-test ratio Decrease the current ratio and decrease the acid-test ratio Decrease the current ratio and increase the acid-test ratio None of above

Find the Acid-test ratio, Cash ratio, and Accruals ratio for the years 2015-2017 first column is...

Find the Acid-test ratio, Cash ratio, and Accruals ratio for the years 2015-2017 first column is 2017 then 2016 then 2015 Cash and due from banks 2,012 1,853 1,382 Interest-bearing deposits in other banks 1,899 3,583 3,932 Federal funds sold and securities purchased under agreements to resell 70 15 - Debt securities held to maturity 1,658 1,362 1,946 Trading account securities - 124 143 Debt securities available for sale 23,403 23,781 22,710 Loans held for sale 348 718 448 Loans, net...

Assume that the current ratio for Arch Company is 3.5, its acid-test ratio is 1.5, and...

Assume that the current ratio for Arch Company is 3.5, its acid-test ratio is 1.5, and its working capital is $330,000. Answer each of the following questions independently, always referring to the original information. Required: a. How much does the firm have in current liabilities? (Do not round intermediate calculations.) b. If the only current assets shown on the balance sheet for Arch Company are Cash, Accounts Receivable, and Merchandise Inventory, how much does the firm have in Merchandise Inventory?...

Assume that the current ratio for Arch Company is 3.5, its acid-test ratio is 2.0, and...

Assume that the current ratio for Arch Company is 3.5, its acid-test ratio is 2.0, and its working capital is $370,000. Answer each of the following questions independently, always referring to the original information. Required: How much does the firm have in current liabilities? (Do not round intermediate calculations.) If the only current assets shown on the balance sheet for Arch Company are Cash, Accounts Receivable, and Merchandise Inventory, how much does the firm have in Merchandise Inventory? (Do not...

Assume that the current ratio for Arch Company is 3.0, its acid-test ratio is 1.5, and...

Assume that the current ratio for Arch Company is 3.0, its acid-test ratio is 1.5, and its working capital is $310,000. Answer each of the following questions independently, always referring to the original information. Required: a. How much does the firm have in current liabilities? b. If the only current assets shown on the balance sheet for Arch Company are Cash, Accounts Receivable, and Merchandise Inventory, how much does the firm have in Merchandise Inventory? c. If the firm collects...

(a) The current ratio of a company is 6:1 and its acid-test ratio is 1:1. If...

(a) The current ratio of a company is 6:1 and its acid-test ratio is 1:1. If the inventories and prepaid items amount to $544,000, what is the amount of current liabilities? (b) A company had an average inventory last year of $200,000 and its inventory turnover was 6. If sales volume and unit cost remain the same this year as last and inventory turnover is 8 this year, what will average inventory have to be during the current year? (c)...

Subjects