An accounting ratio that considers only quick assets to determine the short-term safety margin of a firm is the?
Answer Details
The accounting ratio that considers only quick assets to determine the short-term safety margin of a firm is called the acid test ratio.
Quick assets are current assets that can be easily converted into cash, such as cash, marketable securities, and accounts receivable. The acid test ratio is a measure of a company's ability to pay off its current liabilities using only its quick assets.
The formula for calculating the acid test ratio is as follows:
Acid test ratio = (Quick assets / Current liabilities)
A high acid test ratio indicates that a company has sufficient quick assets to cover its current liabilities, which are debts that are due within a year. This indicates that the company is in a good financial position to meet its short-term obligations.
In summary, the acid test ratio is an important measure of a company's short-term liquidity and financial strength, and it helps investors and creditors assess the company's ability to meet its obligations in the short-term.