ACCA Financial Management (F9) Certification Practice Exam

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What does the Acid Test Ratio measure?

  1. Current Assets / Current Liabilities

  2. (Current Assets - Inventory) / Current Liabilities

  3. Current Liabilities / Total Assets

  4. Current Assets / Total Debts

The correct answer is: (Current Assets - Inventory) / Current Liabilities

The Acid Test Ratio, also known as the Quick Ratio, specifically measures a company's ability to meet its short-term obligations without relying on the sale of its inventory. This is important because inventory can sometimes be illiquid or take time to convert into cash. By excluding inventory from current assets, the formula focuses on the most liquid assets that can quickly be turned into cash. The correct formula for calculating the Acid Test Ratio is (Current Assets - Inventory) divided by Current Liabilities. This calculation gives a clearer picture of a company's short-term liquidity and financial health, as it only considers accounts receivable and cash or cash equivalents, which are more readily available to settle debts. This measure is particularly useful for creditors and investors as it provides insights into the operational efficiency and financial stability of a business beyond just the total current assets.

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