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.