The Acid-Test Ratio Differs from the Current Ratio in That

question 173

Multiple Choice

The acid-test ratio differs from the current ratio in that:

• A) The acid-test ratio measures profitability and the current ratio does not.
• B) The acid-test ratio excludes short-term investments from the calculation.
• C) The acid-test ratio is a measure of liquidity but the current ratio is not.
• D) Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio.
• E) Liabilities are divided by current assets.

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Definitions:

ABC System

A system of controlling inventory that recognizes the differing cost and importance of various items. A parts are expensive and/or important and are controlled carefully. C parts are cheap and plentiful, so little effort is expended to monitor them. B parts are between As and Cs.

Inventory Management

The oversight of non-capitalized assets (inventory) and stock items, involving the control of ordering, storing, and using a company's inventory.

Accessible

Refers to something that can be easily approached, entered, or used; in financial terms, it may refer to assets or funds that can be readily tapped or utilized.

Commercial Paper

Corporations issue this unsecured, short-term financial instrument to cover expenses related to payroll, accounts payable, and inventories.