Which of the following explains the short term solvency of a company?
Question 1 Report
Which of the following explains the short term solvency of a company?
Answer Details
The acid test ratio is a financial ratio that helps to measure a company's short-term solvency. It measures the company's ability to pay off its current liabilities using its current assets, excluding inventory.
The formula for the acid test ratio is:
Acid Test Ratio = (Current Assets - Inventory) / Current Liabilities
A company with a high acid test ratio is considered to have good short-term solvency because it has enough liquid assets to pay off its current liabilities. A low acid test ratio, on the other hand, may indicate that the company has difficulty paying off its short-term obligations.
Therefore, the correct option is the acid test ratio.
Download The App On Google Playstore
Everything you need to excel in your exams
Personalized AI Learning Chat Assistant
200,000+ Exam Questions Across IGCSE, JAMB, WAEC & NECO
Over 3,900 Lesson Notes
Offline Support - Learn Anytime, Anywhere
Green Bridge Timetable
Literature Summaries & Potential Questions
Track Your Performance & Progress
In-depth Explanations for Comprehensive Learning