Which of the following quick (acid test) ratios is generally considered the most desirable for a company, indicating sufficient liquidity without excessive idle assets?

• A. 2:1
• B. 0.2:1
• C. 0.5:1
• D. 1:1

Answer: (D)

Verified step by step guidance

1. Understand the concept of the quick (acid test) ratio: It measures a company's ability to meet its short-term obligations using its most liquid assets, excluding inventory. The formula is Quick Ratio = (Current Assets - Inventory) / Current Liabilities.
2. Recognize that a desirable quick ratio indicates sufficient liquidity to cover liabilities without excessive idle assets. A ratio of 1:1 means the company has exactly enough liquid assets to cover its current liabilities.
3. Evaluate the given options: A ratio of 2:1 suggests excessive idle assets, which may not be efficient. Ratios of 0.2:1 and 0.5:1 indicate insufficient liquidity to cover liabilities.
4. Conclude that the most desirable quick ratio is 1:1, as it balances liquidity and efficiency, ensuring the company can meet obligations without holding excessive liquid assets.
5. Apply this understanding to similar problems by analyzing the quick ratio formula and interpreting the implications of different values for liquidity and asset management.