Question

A certain company has an acid test ratio of 0.97. This implies which of the following?1. Current liabilities are less than the quick assets of the company.

2. Current liabilities are greater than the quick assets of the company.
3. Current liabilities are greater than the current assets of the company.
4. Current liabilities are less than the current assets of the company.

Answer 1

A company with an acid test ratio of 0.97 has current liabilities that are greater than its quick assets, indicating current liabilities exceed assets that can be easily liquidated to pay off those liabilities.

Step-by-step explanation:

If a company has an acid test ratio of 0.97, it means that the company's quick assets are slightly less than its current liabilities. This is because the acid test ratio is calculated by dividing quick assets by current liabilities. Quick assets are those that can be quickly converted into cash, typically within 90 days, and do not include inventory, prepayments, or supplies.

Therefore, the correct answer to the question is:
2. Current liabilities are greater than the quick assets of the company.

This ratio is a stringent test of a company's liquidity and its ability to meet its short-term obligations without selling inventory.

Answer 2

Answer: 2. Current liabilities are greater than the quick assets of the company.

Step-by-step explanation:

The acid-test ratio is a method of checking if the company has enough quick assets ( most liquid current assets) to enable it cover its current liabilities.

It is calculated by dividing the current assets less the inventory by the current liabilities. A ratio of 0.97 therefore means that the denominator which are the current liabilities are more than the quick assets of the company.