# ECONOMICS

## COST ACCOUNTING

### PERFORMANCE MEASUREMENT

 Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
If the current ratio for a company is equal to its acid test ratio, then: A the current ratio must be greater than one B the company does not carry any inventory C trade receivables plus cash is greater than trade payables minus inventory D working capital is positive
 A the current ratio must be greater than one B the company does not carry any inventory C trade receivables plus cash is greater than trade payables minus inventory D working capital is positive
Explanation:

Detailed explanation-1: -The current ratio will always be greater than or equal to the acid test ratio. If a company has no liabilities its return on equity will equal its return on assets. Inventory turnover is generally a more important ratio for a manufacturing firm than a service firm.

Detailed explanation-2: -The acid test ratio, or quick ratio, is a measure of a company’s liquidity. It is calculated by dividing a company’s current assets by its current liabilities. The current ratio is a measure of a company’s liquidity and its ability to pay its short-term obligations.

Detailed explanation-3: -If an entity’s acid test ratio exceeds 1.0, it is considered financially secure and sufficiently capable of meeting its short-term liabilities. In addition, this ratio is a more conservative measure than the popularly used current ratio as it excludes inventory, which is considered to take longer to convert into cash.

Detailed explanation-4: -Interpretation of the Acid-Test Ratio The higher the ratio, the better the company’s liquidity and overall financial health. A ratio of 2 implies that the company owns \$2 of liquid assets to cover each \$1 of current liabilities.

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