How does the acid test ratio differ from the current ratio?

How does the acid test ratio differ from the current ratio?

• A. It excludes stock from current assets in the calculation.
• B. It includes all current assets including stock.
• C. It uses total liabilities rather than assets.
• D. It measures long-term solvency.

Answer: (B)

Liquidity measures differ in how they treat inventory. The acid test ratio (quick ratio) focuses on the most liquid current assets—cash, receivables, and marketable securities—and excludes stock because stock can be hard to convert quickly into cash. By omitting inventory, it provides a stricter test of a business’s ability to meet short-term obligations without selling stock. The current ratio, in contrast, includes stock, giving a broader sense of liquidity but one that can be more optimistic if inventory would be slow to convert. The other ideas—using total liabilities instead of assets, or measuring long-term solvency—do not describe this ratio. So the correct description is that the acid test ratio excludes stock from current assets in the calculation.

Liquidity measures differ in how they treat inventory. The acid test ratio (quick ratio) focuses on the most liquid current assets—cash, receivables, and marketable securities—and excludes stock because stock can be hard to convert quickly into cash. By omitting inventory, it provides a stricter test of a business’s ability to meet short-term obligations without selling stock. The current ratio, in contrast, includes stock, giving a broader sense of liquidity but one that can be more optimistic if inventory would be slow to convert. The other ideas—using total liabilities instead of assets, or measuring long-term solvency—do not describe this ratio. So the correct description is that the acid test ratio excludes stock from current assets in the calculation.