What is the Acid-Test Ratio?
The acid test ratio represents an in-depth accounting of a company to adequately manage the outstanding liabilities currently held by the corporation. This process does not involve taking into account all the tangible and intangible assets of the company and applying the worth to the indebtedness currently held by the organization. With the acid-test ratio, only assets that do not involve prepaid services and the worth of goods in inventory are considered as part of the evaluation. Here are some of the reasons why the application of an acid test ratio can be a good idea. While there are several functions of the acid-test ratio, the main purpose is not to determine if the corporation has enough total assets that could be liquidated in order to pay off all outstanding debts. Instead, the idea is to determine if the company has current reasonable liquid assets to pay off the debt within terms, while still being able to maintain an ongoing operation. This is why such assets as inventories
