The short term solvency of a company is determined with ……………………. ratio

Q: The short term solvency of a company is determined with ……………………. ratio

The short term solvency of a company is determined with ......................... ratio acid test ✓ current debtors to equity gross profit margin Explanation The acid test ratio (also called the quick ratio) is used to measure a company's short-term solvency. It shows whether a business can pay its current liabilities using only its most liquid assets, without needing to sell inventory. The formula is: Acid Test Ratio = (Current Assets - Inventory) / Current Liabilities. By excluding inventory, this ratio gives a stricter measure of liquidity than the current ratio. Inventory is excluded because it may take time to sell and convert to cash. A ratio of 1:1 or higher is generally considered healthy. It means the company has enough liquid assets to cover its short-term debts. A ratio below 1 may indicate potential liquidity problems. The current ratio includes all current assets including inventory, so it is less strict. Gross profit margin measures profitability, not solvency. The debtors to equity ratio measures how much the business relies on credit sales relative to owner investment.

Question

Answer 1

The short term solvency of a company is determined with ……………………. ratio

acid test ✓
current
debtors to equity
gross profit margin

Explanation

The acid test ratio (also called the quick ratio) is used to measure a company’s short-term solvency. It shows whether a business can pay its current liabilities using only its most liquid assets, without needing to sell inventory.

The formula is: Acid Test Ratio = (Current Assets – Inventory) / Current Liabilities. By excluding inventory, this ratio gives a stricter measure of liquidity than the current ratio. Inventory is excluded because it may take time to sell and convert to cash.

A ratio of 1:1 or higher is generally considered healthy. It means the company has enough liquid assets to cover its short-term debts. A ratio below 1 may indicate potential liquidity problems.

The current ratio includes all current assets including inventory, so it is less strict. Gross profit margin measures profitability, not solvency. The debtors to equity ratio measures how much the business relies on credit sales relative to owner investment.