GENERAL KNOWLEDGE

Detailed explanation-1: -For most industries, the acid-test ratio should exceed 1. If it’s less than 1, then companies do not have enough liquid assets to pay their current liabilities and should be treated with caution.

Detailed explanation-2: -An acid-test ratio of 1.0 means that a company has enough liquid assets to cover its current liabilities. This is considered a good sign that the company is in a healthy financial position.

Detailed explanation-3: -Ideally, a business should have an acid-test ratio of at least 1:1. A company with less than a 1:1 acid-test ratio will want to create more quick assets.

Detailed explanation-4: -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-5: -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.