Final answer:
The acid-test ratio, also known as the quick ratio, is a measure of a company's ability to pay off its short-term obligations using its most liquid assets.
Step-by-step explanation:
The acid-test ratio, also known as the quick ratio, is a measure of a company's ability to pay off its short-term obligations using its most liquid assets. It is calculated by subtracting inventory from current assets and then dividing the result by current liabilities.
Formula:
Acid-Test Ratio = (Current Assets - Inventory) / Current Liabilities
For example, if Marjoram Company has $500,000 in current assets, $200,000 in inventory, and $150,000 in current liabilities, the acid-test ratio would be:
(500,000 - 200,000) / 150,000 = 2.33