Question

Which of the following ratios is considered to be a more stringent measure of a company's ability to pay its current liabilities than the current ratio?

a) acid-test ratio
b) days' sales in receivables
c) debt ratio
d) equity ratio

Answer 1

The acid-test ratio is a more stringent measure of a company's ability to pay its current liabilities than the current ratio, as it excludes inventory and less liquid assets.

Step-by-step explanation:

The ratio considered to be a more stringent measure of a company's ability to pay its current liabilities than the current ratio is the acid-test ratio. Unlike the current ratio, which includes all current assets, the acid-test ratio, also known as the quick ratio, subtracts inventory and other less liquid current assets, as they are not as easily convertible to cash within a short period. Therefore, it provides a more conservative view of a company's short-term liquidity and ability to meet its obligations without having to sell inventory or collect receivables.