If a company has inventory, the quick (acid test) ratio will always be ______ the current ratio.

• A. unrelated to
• B. greater than
• C. equal to
• D. less than

Answer: (D)

Verified step by step guidance

1. Understand the concept of the current ratio: The current ratio is calculated as Current Assets divided by Current Liabilities. It includes all current assets, such as cash, accounts receivable, and inventory.
2. Understand the concept of the quick (acid test) ratio: The quick ratio is calculated as (Current Assets - Inventory) divided by Current Liabilities. It excludes inventory because inventory is considered less liquid compared to other current assets.
3. Compare the formulas: Since the quick ratio excludes inventory, it will always be less than or equal to the current ratio. This is because inventory is a part of current assets, and removing it reduces the numerator in the quick ratio formula.
4. Analyze the relationship: The quick ratio focuses on the most liquid assets, while the current ratio includes all current assets. Therefore, the quick ratio will always be less than the current ratio if inventory is present.
5. Conclude the answer: Based on the comparison and analysis, the quick (acid test) ratio will always be less than the current ratio when inventory is included in the current assets.