The acid-test (quick) ratio is different from the current ratio in that it:

• A. excludes inventory from current assets in the numerator
• B. includes all current assets and current liabilities
• C. is always higher than the current ratio
• D. measures a company's profitability

Answer: (A)

Verified step by step guidance

1. Understand the concept of the acid-test (quick) ratio: It is a financial metric used to evaluate a company's short-term liquidity by measuring its ability to pay off current liabilities using its most liquid assets, excluding inventory.
2. Compare the acid-test (quick) ratio to the current ratio: The current ratio includes all current assets (such as cash, accounts receivable, and inventory) in the numerator, while the acid-test ratio excludes inventory because inventory is less liquid and may take time to convert into cash.
3. Identify the formula for the acid-test (quick) ratio: The formula is \( \text{Acid-test ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}} \). This formula highlights the exclusion of inventory from the numerator.
4. Analyze why inventory is excluded: Inventory is excluded because it may not be readily convertible to cash in the short term, making it less reliable for immediate liquidity needs.
5. Clarify the purpose of the acid-test (quick) ratio: It is designed to provide a more conservative measure of liquidity compared to the current ratio, focusing on assets that can be quickly converted into cash to meet short-term obligations.