NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationHard
A portfolio manager is analyzing a company's financial statements. To assess the company's ability to meet its short-term obligations without relying on inventory sales, the manager calculates the ratio of its quick assets to its current liabilities. This calculation represents the:
- AQuick Ratio (Acid-Test Ratio)
- BDebt-to-Equity Ratio
- CReturn on Assets
- DCurrent Ratio
Show answer & explanationAnswer & explanation
Correct answer: A. Quick Ratio (Acid-Test Ratio)
The Quick Ratio, also known as the Acid-Test Ratio, specifically measures a company's ability to meet its short-term obligations using only its most liquid assets (cash, marketable securities, and accounts receivable), excluding inventory.
Why the other options are wrong
- B. The Debt-to-Equity Ratio measures leverage, not short-term liquidity.
- C. Return on Assets measures profitability, not liquidity.
- D. The Current Ratio includes inventory in current assets, which is explicitly excluded by the question's criteria.
Quick Ratio (Acid-Test Ratio)
The Quick Ratio measures a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory. It is a more conservative liquidity measure than the current ratio.
- Formula: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
- Excludes inventory
- Indicates immediate liquidity
Memory trick: Quick Cash for Quick Bills.