COST ACCOUNTING
PERFORMANCE MEASUREMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the current ratio must be greater than one
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the company does not carry any inventory
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trade receivables plus cash is greater than trade payables minus inventory
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working capital is positive
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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.