Acid test ratio of a firm measures the

Assessment: WAEC SSCE - Financial Accounting - 2021 (Objective) Subject: Financial Accounting

Question 1 Report

Acid test ratio of a firm measures the 

Answer Details
The acid test ratio of a firm measures its liquidity. Specifically, it evaluates a company's ability to pay off its short-term debts using its most liquid assets (such as cash, marketable securities, and accounts receivable) without relying on the sale of inventory. In other words, it indicates whether a company has enough readily available resources to cover its immediate financial obligations. A higher acid test ratio suggests that a company is more capable of meeting its short-term liabilities, while a lower ratio indicates a higher risk of default. Therefore, the acid test ratio is an important financial metric for investors and creditors to assess the financial health and stability of a company.
Read lesson note on Nature And Significance Of Accounting (JAMB)
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