Business – 10.2 Analysis of published accounts – Liquidity ratios | e-Consult
10.2 Analysis of published accounts – Liquidity ratios (1 questions)
Login to see all questions.
Click on a question to view the answer
The acid‑test ratio excludes inventory from current assets, focusing only on assets that can be quickly converted to cash. Reasons for preferring it include:
- Inventory may not be readily saleable: In many industries, inventory can be slow‑moving or require discounting to sell, so it does not provide a reliable source of immediate cash.
- More conservative measure of liquidity: By ignoring inventory, the ratio offers a stricter test of a firm’s ability to meet short‑term obligations, giving creditors and managers a clearer picture of cash‑flow risk.
Consequently, the acid‑test ratio is often regarded as a more prudent indicator of short‑term financial health, especially for firms with large or illiquid stock holdings.