Which of the Following Describes the Key Significance of the Acid-Test

question 40

Multiple Choice

Which of the following describes the key significance of the acid-test ratio?

• A)It measures a company's ability to pay its current liabilities if they are due immediately.
• B)It measures the ability of the company to earn profits out of the sales made by it.
• C)It reflects how much long-term debt a company has.
• D)It indicates how much cash could be realized by selling the inventory.

---

Definitions:

Financial Asset

Any asset that is cash; an equity instrument of another entity; a contractual right to receive cash or another financial asset from another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or a contract that may be settled in the entity’s own equity instruments and is a non-derivative for which the entity may be obliged to receive a variable number of the entity’s own equity instruments, or a derivative that may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.

Marketplace Convention

Commonly accepted standards, norms, or practices adopted by a marketplace or industry.

Regulation

The act of controlling, guiding, or managing activities through rules or laws created by governments or regulatory bodies to achieve specific outcomes.

Compound Financial Instrument

A financial instrument that has characteristics that are a combination of a financial asset, financial liability or equity instrument.