Question

You have just calculated the acid-test ratio for Peak Performance Sporting Goods [acid test ratio = 1.0]. As a loan officer, which statement best reflects an understanding of these results?

a) Peak Performance Sporting Goods is financially stable.
b) Peak Performance Sporting Goods may struggle to meet its short-term obligations.
c) Peak Performance Sporting Goods is highly profitable.
d) Peak Performance Sporting Goods has a strong market position.

Answer 1

An acid-test ratio of 1.0 suggests that Peak Performance Sporting Goods may struggle to meet its short-term obligations.

Step-by-step explanation:

The acid-test ratio measures a company's ability to meet its short-term obligations and indicates its liquidity position. An acid-test ratio of 1.0 means that for every dollar of current liabilities, the company has $1 of highly liquid assets to cover those obligations. In this case, if Peak Performance Sporting Goods has an acid-test ratio of 1.0, it suggests that the company may struggle to meet its short-term obligations.