Which financial metric is also known as the acid-test ratio?

• A. Current ratio
• B. Quick asset ratio
• C. Accounts receivable turnover
• D. Debt-to-equity ratio

Answer: (B)

The acid-test ratio focuses on a company’s immediate ability to cover short-term obligations using the most liquid assets. It excludes inventory because inventory isn’t as readily converted to cash, so it uses only cash, marketable securities, and accounts receivable. The formula is (cash + marketable securities + accounts receivable) divided by current liabilities. This provides a stricter view of liquidity than the current ratio, which includes inventory. It’s also distinct from measures of how quickly receivables are collected or from leverage ratios. That’s why the quick asset ratio is the correct labeling for the acid-test ratio.