Question

The appropriate ratio for indicating liquidity crisis is .

• A. Operating ratio
• B. Sales turnover ratio
• C. Current ratio
• D. Acid test ratio

Answer 1

The correct option is D Acid test ratio

Acid test ratio or Quick ratio = Quick Assets/ Current Liabilities

= [Current Assets minus Inventory]/Current Liabilities

The Quick ratio is a much more conservative measure of short term liquidity than the Current ratio. We reduce the amount of funds held up in inventory form the current assets ,so that we can get a clear picture of how much fund can we mobilize for payment of dues in case of a cash crunch or a liquidity crisis.