You Have Just Calculated the Acid-Test Ratio for Peak Performance

question 350

Multiple Choice

You have just calculated the acid-test ratio for Peak Performance Sporting Goods [acid test ratio = 1.0]. As a loan officer for the local bank, you are called into your boss's office to interpret the results of this ratio. Which of the following statements best reflects an understanding of these results?

• A) A company with an acid-test ratio = 1.0 demonstrates the ability to operate very conservatively. The bank should anticipate that this firm will always be able to meet its short-term liabilities.
• B) This company is already having problems meeting its short-term liabilities.
• C) An acid-test ratio = 1.0 means that this firm has $1.00 in current assets for every $2.00 in current liabilities. Peak Performance is a well-run operation, as long as it can continue to sell off its inventory.
• D) An acid-test ratio = 1.0 tells us that without adequate inventory turnover, this company may represent a higher risk. Peak Performance's acid-test ratio shows that the firm maintains $1.00 in current assets for every $1.00 in current liabilities.

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Definitions:

Crude Quantity Theory

A basic hypothesis regarding the relationship between the quantity of money in an economy and its level of prices.

Constant

A value that remains unchanged throughout the scope of an equation, analysis, or experiment.

PQ

A notation commonly used in economics to represent the product of price (P) and quantity (Q), indicating the total revenue.

GDP

Gross Domestic Product, the total value of all goods and services produced within a country in a given period.